-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F/vwVht1xaywkDAOuO9Zf77NnRiGecl6J4EsK2GCW87Yh+8gcsQir6LP04LwMGu6 5JRaSwpBkVI8F8RdqenwoA== 0001214659-07-000218.txt : 20070205 0001214659-07-000218.hdr.sgml : 20070205 20070205061624 ACCESSION NUMBER: 0001214659-07-000218 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20061031 FILED AS OF DATE: 20070205 DATE AS OF CHANGE: 20070205 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CDEX INC CENTRAL INDEX KEY: 0001173738 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 522336836 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-49845 FILM NUMBER: 07578290 BUSINESS ADDRESS: STREET 1: 1700 ROCKVILLE PIKE STREET 2: STE 400 CITY: ROCKVILLE STATE: MD ZIP: 20852 BUSINESS PHONE: 301-881-0080 MAIL ADDRESS: STREET 1: 1700 ROCKVILLE PIKE STREET 2: STE 400 CITY: ROCKVILLE STATE: MD ZIP: 20852 10KSB 1 s1317110ksb.txt FOR THE FISCAL YEAR ENDED 10/31/06 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended October 31, 2006 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From _____ to ____ Commission File Number 000-49845 CDEX INC. (Exact name of small business issuer in its charter) Nevada 52-2336836 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4555 South Palo Verde Road, Suite 125 Tucson, Arizona, 85714 520-514-6393 (Address of principal executive offices and registrant's phone number) Securities registered under Section 12(b) of the Exchange Act: None. Securities registered under Section 12(g) of the Exchange Act: Common stock, $.005 par value per share. Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year: $283,385. Check whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The aggregate market value of the Class A common stock held by non-affiliates was approximately $28,618,873 on January 17, 2006 based on the last reported sale price of the registrant's Class A common stock on the Over-the-Counter Bulletin Board (OTCBB). APPLICABLE ONLY TO CORPORATE REGISTRANTS The number of shares outstanding of the issuer's common stock as of January 29, 2007 was 39,299,660 shares. DOCUMENTS INCORPORATED BY REFERENCE: none Transitional Small Business Disclosure Format Yes |_| No |X| CDEX INC. FORM 10-KSB For the Fiscal Year Ended October 31, 2006
INDEX Page Part I Item 1. Description of Business.........................................................................................3 Item 2. Description of Property.........................................................................................8 Item 3. Legal Proceedings...............................................................................................8 Item 4. Submission of Matters to a Vote of Security Holders.............................................................8 Part II Item 5. Market for Common Equity and Related Stockholder Matters........................................................8 Item 6. Management's Discussion and Analysis of Financial Condition or Plan of Operation................................9 Item 7. Financial Statements............................................................................................17 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................17 Item 8A. Controls and Procedures.........................................................................................17 Item 8B. Other Information...............................................................................................18 Part III Item 9. Directors and Executive Officers of the Registrant..............................................................18 Item 10. Executive Compensation..........................................................................................22 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..................24 Item 12. Certain Relationships and Related Transactions..................................................................25 Part IV Item 13. Exhibits, Lists and Reports on Form 8-K.........................................................................25 Item 14. Principal Accountant Fees and Services..........................................................................26 Financial Statements..............................................................................................................F1 Signatures........................................................................................................................27
2 PART I This document contains forward-looking statements as that term is defined in the federal securities laws. Forward-looking statements can be identified by the use of words such as "expects," "plans," "may," "anticipates," "believes," "should," "intends," "estimates," and other words of similar meaning. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, without limitation, the ability of the Company to raise capital to finance the development of its chemical detection products, the effectiveness, profitability and the marketability of those products, the ability of the Company to protect its proprietary information, the establishment of an efficient corporate operating structure as the Company grows and, other risks detailed from time-to-time in our filings with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update any forward-looking statements. ITEM 1. DESCRIPTION OF BUSINESS GENERAL CDEX Inc. is a technology development company that is currently applying its patented and patents pending chemical detection technologies to develop products in the healthcare, security, and brand protection markets. CDEX is a public company and its common stock is traded on the OTC Bulletin Board (OTCBB) under the symbol "CEXI.OB". CDEX was incorporated in the State of Nevada on July 6, 2001 and maintains its corporate offices and research and development laboratories in Tucson, Arizona. Currently, CDEX is focused in three distinct markets: 1. Healthcare - Validation of substances and quality assurance (e.g., validation of prescription and compounded medications to provide for patient safety, detection of the diversion of narcotics and controlled substances returned from operating room suites to the operating room pharmacy); 2. Security & Public Safety - Identification of substances of concern (e.g., explosives, illegal drugs, chemical/biological weapons, and the detection of counterfeit drugs and medications to assist in the protection of the nation's drug supply); and 3. Brand Protection - Detection of counterfeit or sub-par products for brand protection (i.e., quality assurance inspection of incoming raw materials, outgoing final products, and products in the distribution channel). All current CDEX product development is based on applying the same underlying technologies. CDEX anticipates acquiring other technologies in the future through partnering and investment. However, unless and until such time as we acquire or develop other technology assets, all of the company's revenues will come from products developed from our current suite of patents and patent pending technologies, or through licensing arrangements with Companies with related intellectual property. OUR TECHNOLOGY Our research efforts are centered on, but not limited to, the use of excitation energy sources and patented/patents pending processing technology for substance verification, authentication, and identification. When certain substances are exposed to excitation energy the substances produce photons at specific wavelengths that form unique spectral fingerprints that can be used as signatures to validate and authenticate the substances. CDEX creates reference signatures of substances of interest, such as selected narcotics, explosive compounds, ingredients of chemical agents, medicines, spirits and liquors, and perfumes, as well as many other substances, and stores them in a reference signature database. CDEX software validates a substance of interest by comparing its signature against the known reference signature of the substance of interest in the Company database. The CDEX advantage is that substances of interest are tested at the molecular or atomic level and their signatures are compared to the known signatures of the substance of interest. This provides rapid validation and authentication that the substance is genuine. CDEX technology does not rely upon packaging schemes such as holograms, inks, ingredient taggants, or RFID tags, all of which can be defeated by determined counterfeiters. 3 PRODUCTS We are currently focusing our resources on developing real-time (within seconds) chemical detection products using proprietary, patented and patents pending technologies. While our primary area of focus for 2006 was products in the medical markets, we did continue research and development on several other potential products areas. For example, in our laboratories, CDEX was able to identify and discriminate between a wide range a substances at varying ranges (e.g., methamphetamine, explosives, and medications) in a wide range of environments (e.g., trace amounts on surfaces, syringes, and IV bags). CDEX is marketing its current products and is in the process of developing other products for different markets and customers. PRINCIPAL PRODUCTS - ------------------ Healthcare Market - Validation of substances and quality assurance. CDEX's current product line is ValiMed(TM), a medication validation unit. This product line consists of three separate solutions targeted to specific areas of the hospital pharmacy. They are ValiMed(TM) Impaired Clinician Solution, ValiMed(TM) Regulatory Compliance Solution, and ValiMed(TM) Patient Safety Solution. o VALIMED(TM) PATIENT SAFETY SOLUTION: Validates High-Risk medications that are uniquely compounded for a specific patient by pharmacies for intravenous or oral administration. This stand-alone product is in production and is currently installed in a number of hospital pharmacy settings. o VALIMED(TM) REGULATORY COMPLIANCE SOLUTION: Validates medications that are batch compounded under USP 797 requirements. ValiMed(TM) is used to validate the accuracy of the end product to insure it is the right drug and the right concentration. This stand-alone product is in production and is currently installed in a number of hospital pharmacy settings. o VALIMED(TM) IMPAIRED CLINICIAN SOLUTION: Aids hospitals in the detection of the diversion of narcotics and controlled substances. It validates returned partial doses from operating room suites in the pharmacy. This insures the clear liquid in a syringe is the labeled narcotic and has not been substituted with another clear liquid such as saline. This stand-alone product is in production and is currently installed in a number of hospital pharmacy settings. PRODUCTS UNDER DEVELOPMENT - The Company has under development, from "proof of concept" to prototype, several product concepts aimed at providing expanded market opportunities for the Company's technology: o METHAMPHETAMINE DETECTION SYSTEM: A handheld, scanning device that is capable of detecting trace amounts of methamphetamine. CDEX is in discussions with specific federal, state and local law enforcement agencies to conduct field-testing of the device. This product exists as a demonstration prototype. We are in Beta Test Cycles with this product and we are seeking partners to finalize commercialization and take this product to market. o MAN-PORTABLE MEDICATION VALIDATION SYSTEM: A laptop based medication validation system that is contained in a small carrying case that is used to discriminate between genuine and counterfeit medications by analyzing the composite chemical signatures of subject medications against the authentic signature. Users scan medications to validate and authenticate medications at the molecular and atomic level before they enter the nation's distribution chain or reach the consumer. This product exists as a demonstration prototype and we are seeking partners to finalize commercialization and take this product to market. o EXPLOSIVE DETECTION SYSTEM: A handheld, explosive detection system that is capable of detecting and classifying trace amounts of explosive substances on the surface of clothing, shoes, luggage, parcels, skin, and personal items. The existing Personnel Security Screening System (PS(3)) is planned to be re-engineered for broader security applications. This product exists as a demonstration prototype and we are seeking potential partners to further the expansion, development, and commercialization of this product. 2006, Year in Review - -------------------- The Company's activities during 2006 were driven by the funds available to pursue the operational plans of the Company. The year started with a program of aggressive development, marketing and research efforts on a broad front. The program was dependent upon achieving our investment goals to support aggressive efforts on multiple fronts. When the investment funding goals were not achieved, 4 the Company began scaling back its efforts and focused on refining products and developing signatures in the medical market and developing a prototype methamphetamine detection unit. While the Company did not progress as broadly as hoped in 2006, there were a number of positive aspects, including increased refinement of the ValiMed(TM) product line based on end user feedback and the start of the beta testing cycle for the methamphetamine detection unit. Further, the Company earned revenue of $283,385 and received $918,562 in customer payments in fiscal 2006, by far the largest in the Company's history. In addition, the company received $225,000 in investment funding in January, 2007, and has entered into agreements for additional funding with payments scheduled to begin in the second quarter of fiscal 2007. On January 9, 2007 the Company held a special meeting of shareholders at which time the shareholders voted to increase the authorized Class A common shares of stock from 50.2 million to 100 million. The additional shares of stock will facilitate future fund raising activities of the Company. In December 2006, the Company announced that it was consolidating its activities in Tucson, Arizona and closing its Maryland office. As part of this consolidation the CEO, Mr. Jim Griffin left the Company and Mr. Tim Shriver assumed the role of acting CEO pending the hiring of a replacement for Mr. Griffin. Lastly, as reported in previous SEC filings, the Company settled a patent infringement law suit with ASD and the Company is pleased to report that it is not aware of any pending litigation. RESEARCH AND DEVELOPMENT (R&D) Efforts were spent primarily directed towards refining of the ValiMed(TM) product based on information from the clients using the product. Additionally, during this time R&D CDEX entered into contracts to outsource the manufacturing for our new proprietary design Cuvette. R&D also developed several next generation "proof of concept" prototypes for the healthcare market. These prototypes employ the same underlying ValiMed(TM) technology, but focus on solving other problems in healthcare, thereby providing us with opportunity to expand CDEX's presence in the healthcare market. In addition, considerable effort was devoted to prototype development of our homeland security product suite. During this time frame R&D undertook development and delivery of the proof of concept prototype for the Methamphetamine Trace Detection Unit. R&D costs were $1,298,594 (including $46,265 for stock compensation) during the 2006 fiscal year, compared with $2,421,875 (including $1,329,626 for stock compensation) during the 2005 fiscal year. We have outsourced certain engineering and manufacturing tasks and will continue this practice. Accordingly, we have entered into Master Services Agreements with several engineering/manufacturing organizations. The agreements generally provide for the contractors to provide services to CDEX from time to time which are to be set forth more specifically in "statements of work" to be executed by each party. Such services may include, without limitation: (i) non-recurring engineering services such as product design, creation and modification of bills of materials, engineering drawing packages, work instructions, manufacturing specifications, fabrication documents and drawings, and survey documents; (ii) prototyping services such as the development and testing of product prototypes, and; (iii) other related design and manufacturing services as needed. Payments for services performed are on a time and materials basis (paid monthly) or on a fixed price basis (paid upon successful completion of each milestone) all as set forth in the statement of work pertaining to the particular services. INDUSTRY AND COMPETITION 1. HEALTHCARE ---------- Healthcare spending continues to increase, fueled by an aging population and increasing cost of healthcare technology. We do not see a change in this trend into the future. There are multiple drivers of demand for the Company's Valimed products. Medication errors are a major problem in the global healthcare market and resources will continue to be allocated to help prevent these errors from occurring. To quantify the problem, it is estimated between 44,000 and 98,000 deaths occur annually due to preventable errors and 770,000 patients are injured by adverse drug events. (IOM Report To Err Is Human.) A study published by Auburn University reported an 8% error rate while observing pharmacist mixing IV preparations. In addition, impaired clinicians present a major problem in healthcare. It is published in the medical literature (AANA J. 1999 Apr; 67(2): 133-40) that approximately 5% to 10% of all healthcare workers with access to narcotics are users of these substances. Substitution of water or saline for injectable narcotics is a common practice to divert and steal these medications. Lastly, USP 797 regulations are being instituted to insure quality and sterility of compounded IV medications in pharmacies. These regulations are primarily focused on sterility of IV medications, but the accuracy of the end product is also included in the regulation. Historically, pharmacists have preformed a visual examination of the end product for accuracy. Based on the number of errors reported, this practice is not effective.. 5 There are 6,600 hospitals in the US and 3,000 have greater than 300 beds (Billian's Healthdata). Adding in the targeted global market for CDEX healthcare products, the number of hospitals would exceed 12,000. The Company believes that its ValiMed(TM) products are applicable to these hospitals and in many cases multiple units would be needed to fulfill the institutions needs. 2. SECURITY & PUBLIC SAFETY ------------------------ Illicit and Counterfeit Drug Detection - -------------------------------------- According to DEA congressional testimony by Joseph T. Rannazzisi, Deputy Chief, Office of Enforcement Operations Drug Enforcement Administration, Methamphetamine is the number one drug problem in America today and the problem continues to increase. Two competing technologies in the methamphetamine detection marketplace are test kits and ion mobilization units. Test kits are inexpensive, but cannot readily detect trace amounts of methamphetamine on surfaces and are a destructive test. The ion mobilization units are expensive to purchase, and require a sophisticated user, airborne substances and relatively high maintenance. CDEX technology may have the advantages of portability, ease of use, low maintenance, and reduced costs. In 2006 the Company announced that it had delivered a prototype device for detecting Methamphetamine to a Beta Test Partner for testing. The Company has also identified market opportunities for the application of its technology in the detection of counterfeit medications. Explosive Detection - ------------------- CDEX believes the explosives detection marketplace is potentially significant because of growing awareness of terrorism due to recent world events. We believe that this marketplace possibly includes the following potential customers: militaries, airport/building security organizations and transportation related organizations, government, law enforcement organizations, and school systems. These markets are global in perspective and large in size. Currently, domestic sales of people screening devices are dominated by a small number of products sold by a handful of vendors. CDEX believes that if it launches chemical detection products that those products will compete with existing detection products, and, depending on the application, may have a competitive advantage by being more advanced than existing tools in a number of areas. There are large competitors in this space that have significantly more resources than CDEX. 3. BRAND PROTECTION ---------------- Based on worldwide counterfeit enforcement activity (investigations, raids, seizures, arrests, charges, convictions, sentences, civil litigation) for 2005, as reported through the DOPIP Security Counterfeit Intelligence Report, more than 3,703 incidents valued at approximately $3.2 trillion were analyzed from 133 countries. The eighth most commonly counterfeited category is Food & Alcohol, 64 incidents worth $11 Million and the fourteenth most commonly counterfeited category is Perfume & Cosmetics, 22 incidents worth $12 Million. US companies, for instance, estimate that between $200bn and $250bn in annual revenue is lost to counterfeiters. The EU claims that 100,000 jobs are lost each year to the same trade. In 2003 it was estimated that counterfeit goods cost the state of New York $34bn, depriving it of $1.6bn in tax revenue (Scotsman.com news). The Company believes these market applications represent business opportunities for the application of its technology. SALES AND MARKETING CDEX's business vision is to develop technologies to the point of market or application viability and then, where management determines it to be beneficial, team with organizations to complete commercial deployment and/or distribution through our sales and marketing channels. In some instances, we may take a technology directly to market. In others, we may seek to license the technology to third parties who will then develop and market products employing it. Our products and technologies may be licensed to original equipment manufacturers, sold direct or via resellers as stand alone end units, or be integrated as sensors that gather and relay information to an integrated solution that is the repository of information gathered from many sources (e.g., in security applications from perimeter, environmental and structural security devices, medication delivery systems). Accordingly, our prospective "client base" varies depending on the application and the stage of development. In marketing our chemical detection products and technologies, we intend to target, via partnerships as well as direct sales, both U.S. and foreign governments, in addition to private industry or individuals requiring confirmation of the presence or absence of substances. We are currently reaching potential customers and partners through our website, participating in industry events (such as trade shows and public meetings), distributing product information through targeted mailings and direct sales activities which include demonstrations of product application and traditional advertising. Planned advertising activities include trade and industry magazines 6 and managed clinical trials where researchers are likely to publish articles discussing the results of the trials. We also anticipate reaching prospective customers via strategic relationships. Effective November 7, 2005, the company entered into a two year exclusive Reseller Agreement with Baxa Corporation ("Baxa") to sell, market, and distribute the ValiMed(TM) product in the USA and Canada. We anticipate focusing on domestic markets before expanding internationally via strategic marketing and manufacturing partnerships. We anticipate partnerships based either on geographic boundaries or by products depending on the partner's market specialty and market presence. We have received unsolicited contacts by prospective partners from the Middle East, Europe, Taiwan, Vietnam, Korea, Malaysia and China based on information on www.cdex-inc.com. These contacts were primarily interested in explosive and drug detection, and the technology's potential use in the electronic manufacturing industry. These contacts may never result in revenue or relationships that will benefit CDEX. CDEX has not applied for licenses or permits to do business directly in any foreign country. CDEX has obtained TUV certification for its ValiMed(TM) product with Elliott Labs in Fremont, CA. TUV tests and certifies that products meet electrical safety standards and electromagnetic interference and compatibility (EMI/EMC) standards. TUV tests and certifies to UL standards for the USA market and CE standards for the European Union market. INTELLECTUAL PROPERTY RIGHTS We rely on non-disclosure agreements, patent, trade secret and copyright laws to protect the intellectual property that we have and plan to develop, but such laws may provide insufficient protection. Moreover, other companies may develop products that are similar or superior to CDEX's or may copy or otherwise obtain and use our proprietary information without authorization. In addition, certain of our know-how and proprietary technology may not be patentable. Policing unauthorized use of CDEX's proprietary and other intellectual property rights could entail significant expense and could be difficult or impossible to do. In addition, third parties may bring claims of copyright or trademark infringement against CDEX or claim that certain of our processes or features violate a patent, that we have misappropriated their technology or formats or otherwise infringed upon their proprietary rights. Any claims of infringement, with or without merit, could be time consuming to defend, result in costly litigation, divert management attention, and/or require CDEX to enter into costly royalty or licensing arrangements to prevent further infringement, any of which could cause a decrease in our profits. The Company makes business decisions regarding which inventions to patent, and in what countries. Currently, the company has 2 patents issued or allowed, and others in various stages of prosecution. In addition, the Company has filed international counterparts to its US patents and applications where it deems appropriate. Our competitive position also depends upon unpatented trade secrets. Trade secrets are difficult to protect. Our competitors may independently develop proprietary information and techniques that are substantially equivalent to ours or otherwise gain access to our trade secrets, such as through unauthorized or inadvertent disclosure of our trade secrets. GOVERNMENT REGULATION The products developed may be subject to various governmental regulations and controls, including that associated with security products in airports, handling of explosive materials and related to x-ray energy. The storage and handling of certain explosive material is subject to licensure. With regard to handling such explosive material, we retain the services of a licensed contractor to transport and store explosive material for testing. Following such testing, the contractor returns the explosive material to a licensed storage facility. It is possible that government agencies may develop additional regulations that impact our initial and future products. The U.S. Food and Drug Administration (FDA) has jurisdiction to regulate computer products and software as medical devices if they are intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease. We have preliminarily determined that our initial products are not medical devices. However, further investigation or a change in FDA policy could subject us to regulation. Noncompliance with applicable FDA requirements can result in such things as fines, injunctions, and suspension of production. Except as specifically mentioned above, we are not currently aware of any other federal, state or local laws that would have a significant adverse impact on development and distribution of our initial products. However, various federal, state or local agencies may propose new legislation pertaining to the use of potentially dangerous materials, to the discharge of materials into the environment, to the manufacturing or marketing of chemical validation products (or designation of one or more of our chemical validation products as medical devices) and/or otherwise potentially relating to the our business which may require us to allocate a portion of our operating budget to ensure full compliance with such regulations. 7 ITEM 2. DESCRIPTION OF PROPERTY The Company leases office space in Maryland under a lease that is now month to month. As mentioned above, the Company is moving its corporate offices to Tucson, Arizona effective February 1, 2007. Accordingly, the leased Maryland office space will no longer be needed after January 31, 2007. The Company leases office and laboratory space in Arizona. The lease expires April 30, 2009 and provides for monthly rent of approximately $3,020 with 3% annual escalations and is cancelable on 120 days notice. The lease was amended in fiscal year 2005 to provide for additional space. The amendment expires December 31, 2007, has non-cancelable lease payments into 2007, and provides for monthly rent of approximately $2,641 with 4% annual escalations. Total rent expense was $43,884 and $86,593 for the years ended October 31, 2005 and 2006, respectively. ITEM 3. LEGAL PROCEEDINGS CDEX is not currently involved in any legal proceedings nor do we have knowledge of any threatened litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 2006. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Our Class A common stock is traded on the Over-The-Counter Bulletin Board ("OTCBB") under the symbol "CEXI.OB." Our shares are thinly traded with low average daily volume. This coupled with a limited number of market makers impairs the liquidity of our common stock, not only in the number of shares of common stock which can be bought and sold, but also through possible delays in the timing of transactions, and lower prices for our common stock than might otherwise prevail. This could make it difficult or impossible for an investor to sell shares of our common stock or to obtain a desired price. Our common stock may be subject to the low-priced security or so called "penny stock" rules that impose additional sales practice requirements on broker-dealers who sell such securities. The Securities Enforcement and Penny Stock Reform Act of 1990 ("Reform Act") requires additional disclosure in connection with any trades involving a stock defined as a "penny stock" (generally defined as, according to recent regulations adopted by the U.S. Securities and Exchange Commission, any equity security that has a market price of less than $5.00 per share, subject to certain exceptions), including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith. The regulations governing low-priced or penny stocks sometimes may limit the ability of broker-dealers to sell CDEX's common stock and thus, ultimately, the ability of the investors to sell their securities in the secondary market. Prices for CDEX shares will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for the shares, CDEX's results of operations, what investors think of CDEX and the chemical detection and validation industry, changes in economic conditions in the industry, and general economic and market conditions. Market fluctuations could have a material adverse impact on the trading price of our shares. If CDEX is unable to maintain NASD registered broker/dealers as market makers, the liquidity of our common stock could be impaired, not only in the number of shares of common stock which could be bought and sold, but also through possible delays in the timing of transactions, and lower prices for our common stock than might otherwise prevail. Furthermore, the lack of market makers could result in CDEX shareholders being unable to buy or sell shares of our common stock on any secondary market. We may be unable to maintain such market makers. The table below sets forth the high and low sales price for our Class A common stock as reported on the OTCBB: High Low ---- --- Fiscal Year Ended October 31, 2006: First quarter $1.32 $0.82 Second quarter $1.22 $0.52 Third quarter $0.80 $0.38 Fourth quarter $0.58 $0.30 8 As the foregoing are over-the-counter market quotations, they reflect inter-dealer prices, without retail markup, markdown, or commissions, and may not represent actual transactions. SHAREHOLDERS Our transfer agent has advised that the approximate number of record holders of common stock at January 17, 2007 was 1,458. However, a large number of our shareholders hold their shares in "street name" with brokerage accounts and, therefore, do not appear on the shareholder list maintained by our transfer agent. DIVIDENDS We have paid no cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS During the fourth quarter of fiscal year 2006, the Company sold 200,000 shares of common stock at an average price of $0.27 per share for proceeds of $54,000, which are for working capital and general corporate purposes. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION You should read the following discussion in conjunction with our audited financial statements and related notes included elsewhere in this document. The following discussion (as well as other discussions in this document) contains forward-looking statements. Please see Forward-Looking Statements for a discussion of uncertainties, risks and assumptions associated with these statements. PLAN OF OPERATION General - ------- CDEX Inc. is a technology development company that is currently applying its patented and patents pending chemical detection technologies to develop products in the healthcare, security, and brand protection markets. CDEX is a public company and its common stock is traded on the OTC Bulletin Board (OTCBB) under the symbol "CEXI.OB". CDEX was incorporated in the State of Nevada on July 6, 2001 and maintains its corporate offices in Rockville, Maryland, and its research and development laboratories in Tucson, Arizona. The company is moving all operations and corporate functions to its Tucson, Arizona offices in 2007. Currently, CDEX is focused in three distinct markets: 1. Healthcare - Validation of substances and quality assurance (e.g., validation of prescription and compounded medications to provide for patient safety, detection of the diversion of narcotics and controlled substances returned from operating room suites to the operating room pharmacy); 2. Security & Public Safety - Identification of substances of concern (e.g., explosives, illegal drugs, chemical/biological weapons, and the detection of counterfeit drugs and medications to assist in the protection of the nation's drug supply); and 3. Brand Protection - Detection of counterfeit or sub-par products for brand protection (i.e., quality assurance inspection of incoming raw materials, outgoing final products, and products in the distribution channel). ValiMed(TM) Product Line - ------------------------ In 2006, CDEX management and staff successfully completed the implementation of the initial production plan for ValiMed(TM) and began shipment of units to our exclusive U.S. and Canadian distributor. As part of the company's ongoing research and development efforts, CDEX continues to build its medication and drug signature library using the new proprietary cuvettes. To date, a total of fifty-three (53) signatures have been added to the signature library. All ValiMed(TM) production units are shipped with the TUV mark indicating that ValiMed(TM) meets the electrical safety, electromagnetic interference (EMI), and electromagnetic compatibility (EMC) test requirements for products sold in the USA, Canada, and the European Union. In addition, ValiMed(TM) has also been tested to the TUV CB Scheme which opens opportunities to market and sell ValiMed(TM) in countries other than the US, Canada, and the European Union. 9 In 2006, CDEX entered into discussions with companies outside the USA who have shown an interest in representing CDEX as its ValiMed(TM) distributor. While these companies may represent significant distribution opportunities for ValiMed(TM), CDEX management cannot guarantee that it will be able to close a distribution agreement with any of the companies in these markets. ValiMed(TM) has transitioned from a beta-test product to a full-scale production product. Year-on-year revenues are up significantly. Management does not expect the revenues from ValiMed(TM) to grow in a linear or predictable manner due to the fact that ValiMed(TM) is a new product that has just been introduced into the market. It is more likely that revenues will be "lumpy" over the next several quarters; with some quarters up and some down. This will continue into the foreseeable future until we have more fully developed our distribution and sales channels and are better able to predict quarterly sales more precisely. In order to increase sales, CDEX must receive additional investment funding to implement its business plan, fund its international marketing and sales initiatives, and provide working capital in order to purchase production materials and parts inventories. If the company is unable to obtain the required funding that it needs through debt or equity financing, the value potential of the ValiMed(TM) product portfolio over the next eight months cannot be realized. Illicit Drug Detector - --------------------- On August 29, 2006, CDEX entered into a contract with Missouri State Highway Patrol (MSHP) for the Meth Gun Pilot Test Program. CDEX is continuing this "beta test" process to refine the Meth Detection Unit for eventual planned introduction into the marketplace. In addition, in 2007, we have expanded the beta testing to other jurisdictions. These beta test cycles will continue until the product is ready for production. . Explosive Trace and Counterfeit Medication Drug Detectors - --------------------------------------------------------- CDEX management has placed the further development of these two products on hold pending receipt of additional equity or debt financing. CDEX does not have the financial resources, at this time, to engage the additional human resources or incur the additional expenses that would be required to bring these products to market. Intellectual Property - --------------------- As stated above, the Company relies on non-disclosure agreements, patent, trade secret and copyright laws to protect the Company's intellectual property. The Company makes a business decision regarding which inventions to patent, and in what countries. Currently, the company has 2 patents issued or allowed, and others in various stages of prosecution. In addition the Company has filed international counterparts to its US patents and applications where it deems appropriate. RESULTS OF OPERATIONS Fiscal Year Ended October 31, 2006 Compared to Fiscal Year Ended October 31, 2005 Revenue: Revenue was $283,385 and $178,607 during the fiscal year ended October 31, 2006 and October 31, 2005, respectively. The increase of $104,778 (or 59%) was from the delivery of ValiMed(TM) units to Baxa Corporation. In addition the Company received payment for 21 units of its Valimed product which it classified as deferred revenue at October 31, 2006, pending final shipment instructions from its customer. The Company also received payment from the Missouri State Highway Patrol for the meth gun pilot test program which it classified as deferred revenue at October 31, 2006. The amount of deferred revenue carried into 2007 is $638,000, which the Company expects to recognize as revenue in 2007. Cost of revenue: Cost of revenue was $141,080 and $85,481 during the fiscal year ended October 31, 2006 and October 31, 2005, respectively. The increase of $55,598 (or 65%) was the result of higher component and manufacturing costs associated with the ValiMed(TM) units due to the higher number of shipped units. Gross margins were consistent in the 50 to 52% range in fiscal 2006 and 2005. Research and development costs: Research and development costs were $1,298,594 during fiscal year ended October 31, 2006, compared with $2,421,875 during the fiscal year ended October 31, 2005. The decrease of $1,123,281 (or 46%) resulted from a decrease primarily in stock compensation and secondarily in payroll expenditures, offset by an increase in expenditures for materials and consultants. Stock compensation decreased because the company did not issue stock as compensation at the same level in fiscal year 2006 compared to fiscal year 2005. General and administrative expenses: General and administrative expenses were $2,222,208 during the fiscal year ended October 31, 2006, compared with $2,896,336 during the fiscal year ended October 31, 2005. This decrease of $674,129 (or 23%) resulted from a decrease in stock compensation, offset by an increase in expenditures primarily in legal fees associated with patent issues and secondarily in payroll. Stock compensation decreased because the company is not issuing stock as compensation at the same level in fiscal year 2006 compared to fiscal year 2005. Legal expense for patent issues exceeded $500,000 in fiscal year 2006 but is expected to decrease in future periods. 10 Other income (expense): Other expense was $21,605 during fiscal year ended October 31, 2006, compared with income of $3,587 during the fiscal year ended October 31, 2005. The expense in fiscal year 2006 was primarily interest expense on notes payable. The income in fiscal year 2005 was primarily from cash in an interest earning account. Net loss was $3,400,102 during the fiscal year ended October 31, 2006, compared with a net loss of $5,221,499 during the fiscal year ended October 31, 2005, due to the foregoing factors. LIQUIDITY AND CAPITAL RESOURCES To date, CDEX has incurred substantial losses, and will require financing for working capital to meet its operating objectives. We anticipate that we will require financing on an ongoing basis unless and until we are able to support our operating activities with additional revenues. As of October 31, 2006, we had negative working capital of $1,566,517, including $56,328 of cash and cash equivalents. We anticipate the need to raise approximately $2,500,000 over the next twelve months to satisfy our current budgetary projections. Our continued operations, as well as the implementation of our business plan, therefore will depend upon our ability to raise additional funds through bank borrowings, equity or debt financing. If the company is not successful in raising the working capital, it may default in its payments to its creditors and could result in the filing of bankruptcy protection. Currently, the company has sufficient cash to fund operations into the second quarter of fiscal 2007, and has entered into agreements for additional funding with payments that would begin in the second quarter of fiscal 2007. The company is actively seeking new investments from its current accredited investors as well as new accredited investors. During the fiscal year ended October 31, 2006, the Company received $479,000 in funding, comprised of: o $133,500 for 6,675 shares of preferred stock at an average price of $20.00 per share, and $22,500 for redeemable preferred stock. o $143,000 for 457,563 shares of common stock at an average price of approximately $0.31 per share. o $180,000 for notes payable. We had a net decrease in cash and cash equivalents of $1,415,913 during the fiscal year ended October 31, 2006, compared with a net increase of $1,000,757 during the fiscal year ended October 31, 2005. We used net cash of $1,808,752 and $2,612,385 in operating activities during the fiscal years ended October 31, 2006 and 2005, respectively, and capitalized $86,162 and 2,108 in patent costs and property and equipment during the fiscal years ended October 31, 2006 and 2005, respectively. We received proceeds in the amount of $479,000 and $3,615,250 from the sale of preferred stock, common stock and notes payable to accredited investors during the fiscal years ended October 31, 2006 and 2005, respectively. OFF-BALANCE SHEET ARRANGEMENTS CDEX has not participated in any off balance sheet financing or other arrangements. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to bad debts, inventory obsolescence, intangible assets, payroll tax obligations, and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We have identified below certain accounting policies which we apply in the preparation of our financial statements. We believe that the policies discussed below are those most critical to our business operations. These policies form the basis of our discussion throughout this section and affect our reported and expected financial results. 11 USE OF ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the date of the financial statements and (iii) the reported amounts of revenues and expenses during the periods covered by our financial statements. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: We maintain cash balances that may exceed federally insured limits. We do not believe that this results in any significant credit risk. We consider all highly liquid investments with original maturities of 90 days or less to be cash equivalents. REVENUE RECOGNITION: Revenue is recognized in compliance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, and EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Sales revenues are recognized when persuasive evidence of an agreement with the customer exists, products are shipped or there is a fixed schedule for delivery, title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed or determinable, collectibility is reasonably assured, and there are no significant future performance obligations. Service revenues are recognized at time of performance. Service maintenance revenues are recognized ratably over the term of the agreement. Deferred revenue represents amounts invoiced or received but not recognized as revenue if the above revenue recognition terms are not met. Specifically, the company does not recognize revenue for ValiMed(TM) units purchased by Baxa Corporation that are warehoused at the company's Tucson facility per Baxa's request (commonly referred to as bill and hold transactions). Such transactions represent $588,000 of deferred revenue at October 31, 2006. Further, the company deferred $50,000 from the Missouri State Highway Patrol (MSHP) for the Meth Gun Pilot Test Program as the program was not completed by October 31, 2006. INVENTORY: Inventory is valued at the lower of cost (at standard, which approximates actual cost on a first-in, first-out basis) or market. Inventory includes the cost of component raw materials and manufacturing. PROPERTY AND EQUIPMENT: Property and equipment are stated at historical cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from two to seven years. Depreciation expense was $16,760 and $23,794 for the years ended October 31, 2005 and 2006, respectively. PATENT: The Company capitalizes the costs of obtaining patents when patents are granted. Patents are amortized (none in fiscal years 2005 and 2006) over their useful lives, generally 17 years. INCOME TAXES: We file our income tax returns on the cash basis of accounting, whereby revenue is recognized when received and expenses are deducted when paid. To the extent that items of income or expense are recognized in different periods for income tax and financial reporting purposes, deferred income taxes are provided to give effect to these temporary differences. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured by applying presently enacted statutory tax rates, which are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized, to the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that the tax rate is enacted. As we have never operated at a profit, no tax benefit has been reflected in the statement of operations and a valuation allowance has been established reducing the net carrying value of the deferred tax asset to zero. RISKS, UNCERTAINTIES AND CONCENTRATIONS: Financial instruments that potentially subject CDEX to significant concentration of credit risk consist primarily of cash equivalents and accounts receivable. In addition, at times CDEX's cash balances exceed federally insured amounts. Accounts receivable represents a portion of the revenue outstanding on these contracts. We provide for estimated credit losses at the time of revenue recognition. STOCK-BASED COMPENSATION: Prior to fiscal year 2006, we provided restricted stock grants to employees and consultants as a principal element of their compensation. We determine compensation expense as the fair value, at the measurement date, of the service received or the common stock issued, whichever is more reliably determined. In the case of employees, the measurement date is the date of grant. In the case of outside consultants, the measurement date is the date at which their performance is complete. This total cost is first reflected as deferred compensation in stockholders' equity (deficit) and then amortized to compensation expense on a straight-line basis over the period over which the services are performed. When the fair value of the common stock is used and the measurement date is not the date of grant, the total cost is re-measured at the end of each reporting period based on the fair market value on that date, and the amortization is adjusted. 12 We have also utilized employment and consulting agreements which combine cash and stock elements of compensation, where a fixed dollar value of stock is awarded to settle non-cash compensation. We have awarded some of the common shares in advance of when the service is performed although these shares are subject to forfeiture in the event of non-performance. We have also paid performance bonuses in awards of common stock. RISK FACTORS You should carefully consider each of the following risk factors and all of the other information in this report. The following risks relate principally to CDEX's business and contain forward-looking statements. Actual results could differ materially from those set forth in the forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements" below. A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT MAY AFFECT CDEX'S ABILITY TO SURVIVE. We have a history of operating losses and an accumulated deficit. Since our principal activities to date have been limited to organizational activities, research and development, product development and limited marketing and sales, CDEX has produced only limited revenues. In addition, we have only limited assets. As a result, we cannot be certain that CDEX will continue to generate revenues or become profitable in the future. If we are unable to obtain customers and generate sufficient revenues to operate profitably, our business will not succeed. CDEX HAS RECEIVED A GOING CONCERN OPINION FROM ITS INDEPENDENT AUDITORS THAT EXPRESSES UNCERTAINTY REGARDING ITS ABILITY TO CONTINUE AS A GOING CONCERN. We have received a report from our independent auditors for the fiscal year ended October 31, 2006 containing an explanatory paragraph that expresses uncertainty regarding our ability to continue as a going concern due to historical negative cash flow. We cannot be certain that our business plans will be successful or what actions may become necessary to preserve our business. Any inability to raise capital may require us to reduce operations or could cause our business to fail. Our limited operating history makes our future operating results unpredictable rendering it difficult to assess the health of our business or its likelihood of success. The inability to assess these factors could result in a total loss of an investor's investment in CDEX. In the case of an established company in an ongoing market, investors may look to past performance and financial condition to get an indication of the health of the company or its likelihood of success. Our short operating history and the evolving nature of the explosives detection and chemical identification markets in which we focus make it difficult to forecast our revenues and operating results accurately. We expect this unpredictability to continue into the future due to the following factors: o the timing of sales of our products and services, particularly in light of our minimal sales history; o difficulty in keeping current with changing technologies; o unexpected delays in introducing new products, new product features and services; o increased expenses, whether related to sales and marketing, product development or administration; o deferral of recognition of our revenue in accordance with applicable accounting principles due to the time required to complete projects; o the mix of product license and services revenue; and o costs related to possible acquisitions of technologies or businesses. CDEX could experience operating losses or even a total loss of our business which, as a result of the foregoing factors, would be difficult to anticipate and could thus cause a total loss of capital invested in CDEX. THE ABSENCE OF A CHIEF FINANCIAL OFFICER LEAVES CDEX WITHOUT THE BENEFIT OF THIS TYPE OF EXPERTISE AND CONSISTENT MONITORING OF CONTROLS AND PROCEDURES WHICH A FULL-TIME CHIEF FINANCIAL OFFICER WOULD AFFORD. In April 2004 we retained a qualified part-time chief financial officer on a 13 consultancy basis. However, we have not retained a permanent, full-time chief financial officer. The responsibilities of the principal accounting and financial officer are currently being handled by our CEO. The Sarbanes-Oxley Act requires public companies to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed with the SEC is recorded, processed, summarized and reported within the time required. This includes controls and procedures to ensure that such information is accumulated and communicated to management, including the chief executive and financial officers, so as to allow timely decisions regarding required disclosure of such information. The Sarbanes-Oxley Act also requires documentation of internal control procedures, remediation as needed, and periodic testing of the controls, and these requirements are expected to apply to smaller companies such as CDEX beginning in 2008. A permanent, full-time chief financial officer would coordinate and oversee these procedures and our disclosure, bringing to bear specific financial and accounting expertise. Our CEO currently performs this function with guidance from our part-time chief financial officer and others. LACK OF ADDITIONAL FINANCING COULD PREVENT US FROM OPERATING PROFITABLY WHICH, EVENTUALLY, COULD RESULT IN A TOTAL LOSS OF OUR BUSINESS. Since our inception, we have funded our operations through borrowings and financings. Current funds available to CDEX may not be adequate for us to be competitive in the areas in which we intend to operate, and we have no arrangements or commitments for ongoing funding. If funding is insufficient at any time in the future, we may not be able to grow revenue, take advantage of business opportunities or respond to competitive pressures. The unavailability of funding could prevent us from producing additional revenues or ever becoming profitable. Our continued operations, as well as the successful implementation of our business plan, may therefore depend upon our ability to raise additional funds of approximately $2,500,000 through bank borrowings or equity or debt financing over the next eighteen months. We continue to seek prospective investors who may provide some of this funding. However, such funding may not be available when needed or may not be available on favorable terms. Certain family members of our management team have advanced funds to CDEX on an as-needed basis although there is no definitive or legally binding arrangement to do so. All such advances have been repaid. If we do not produce revenues and become profitable, eventually, we will be unable to sustain our business. CDEX SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION IF WE ISSUE ADDITIONAL EQUITY TO FUND OPERATIONS OR ACQUIRE BUSINESSES OR TECHNOLOGIES. If working capital or future acquisitions are financed through the issuance of equity securities, CDEX shareholders will experience significant dilution. In addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of the currently outstanding CDEX shares of common stock. The conversion of future debt obligations into equity securities could also have a dilutive effect on our shareholders. Regardless of whether our cash assets prove to be inadequate to meet our operational needs, we may elect to compensate providers of services by issuing stock in lieu of cash. OUR POTENTIAL INABILITY TO PROTECT THE PROPRIETARY RIGHTS IN CDEX'S TECHNOLOGIES AND INTELLECTUAL PROPERTY MAY HAMPER OUR ABILITY TO MANUFACTURE PRODUCTS WHICH WOULD PREVENT US FROM EARNING REVENUES OR BECOMING PROFITABLE. Our success and ability to compete will depend in part on the protection of our potential patents and other proprietary information. We currently have six patent applications pending for our chemical detection technologies. We rely on non-disclosure agreements and patent and copyright laws to protect the intellectual property that we have developed and plan to develop. However, such agreements and laws may provide insufficient protection. Moreover, other companies may develop products that are similar or superior to CDEX's or may copy or otherwise obtain and use our proprietary information without authorization. If a third party were to violate one or more of our patents, we may not have the resources to bring suit or otherwise protect the intellectual property underlying the patent. In the event of such a violation or if a third party appropriated any of our unpatented technology, such party may develop and market products which we intend to develop and/or market. We would lose any revenues which we would otherwise have received from the sale or licensing of those products. This could prevent our ever making a profit on any products based upon the misappropriated technology. Policing unauthorized use of CDEX's proprietary and other intellectual property rights could entail significant expense and could be difficult or impossible. In addition, third parties may bring claims of copyright or trademark infringement against CDEX or claim that certain of our processes or features violate a patent, that we have misappropriated their technology or formats or otherwise infringed upon their proprietary rights. Any claims of infringement, with or without merit, could be time consuming to defend, result in costly litigation, divert management attention, and/or require CDEX to enter into costly royalty or licensing arrangements to prevent further infringement, any of which could increase our operating expenses and thus prevent us from becoming profitable. 14 Our competitive position also depends upon unpatented trade secrets. Trade secrets are difficult to protect. Our competitors may independently develop proprietary information and techniques that are substantially equivalent to ours or otherwise gain access to our trade secrets, such as through unauthorized or inadvertent disclosure of our trade secrets. If this occurs, our competitors may use our processes or techniques to develop competing products and bring them to market ahead of us. This could prevent us from becoming profitable. We may rely on certain intellectual property licensed from third parties, and may be required to license additional products or services in the future, in order to move forward with our business plan. These third party licenses may be unavailable on acceptable terms, when needed or at all. An inability to enter into and maintain any of these licenses could prevent us from developing or marketing products based upon the underlying technology and could prevent us from earning revenues on these products or from becoming profitable. For a discussion of the status of a certain patent infringement lawsuit filed against CDEX in the District Court of Colorado, see "Legal Proceedings." NO ASSURANCE OF SUCCESSFUL MANUFACTURING MAY AFFECT OUR ABILITY TO SURVIVE. CDEX itself has no experience in manufacturing commercial quantities of products, and our management has had limited experience in this area. We presently have no plans for developing in-house manufacturing capability beyond aggregating off-the-shelf components for our initial units into a final assembly. Accordingly, we depend upon outside manufacturers to manufacture and assemble our products. In our early stages with each new product, we plan to do the final assembly and testing of the initial units in-house. We cannot be certain that the terms of such arrangement will be favorable enough to permit our products to compete effectively in the marketplace. DEPENDENCE ON OUTSOURCED MANUFACTURING MAY AFFECT OUR ABILITY TO BRING PRODUCTS TO MARKET. At present, we do not plan to manufacture any of our products in-house. We are considering different possibilities for bringing different products to market among them, licensing to third parties or outsourcing manufacturing. The risks of association with outsourced manufacturers are related to their operations, finances and suppliers. CDEX would have little control over an outsourced manufacturer and may suffer losses if any outside manufacturer fails to perform its obligations to manufacture and ship the manufactured product. These manufacturers' financial affairs may also affect our ability to obtain product from them in a timely fashion should they fail to continue to obtain sufficient financing during a period of incremental growth. Problems with outsourced manufacturers could damage our relationships with our clientele and cost us future revenues. If we are unable to contract with adequate manufacturers, and in the absence of licensing or other means, we may be unable to market our products. This would prevent us from earning revenues. LACK OF MARKET ACCEPTANCE MAY LIMIT OUR ABILITY TO SELL PRODUCTS AND GENERATE REVENUES WHICH WOULD PREVENT US FROM EARNING REVENUES OR BECOMING PROFITABLE. We cannot be certain that any products that we successfully develop will ever achieve wide market acceptance. Our products, if successfully developed, may compete with a number of traditional products manufactured and marketed by major technology companies, as well as new products currently under development by such companies and others. In the explosives detection marketplace, for example, many airports and other facilities and agencies have already invested in and implemented systems that are based upon technology that is different from ours. While we believe our technology is superior, we will have to demonstrate its superiority to these potential customers in order to sell our products and generate revenues. We may encounter similar obstacles in other application areas. The degree of market acceptance of our products will depend on a number of factors, including the establishment and demonstration of the efficacy of the product candidates, their potential advantage over alternative methods and reimbursement policies of government and third party payors. We cannot be certain that the marketplace in general will accept and utilize any of our products. If potential customers do not accept and purchase our products, we will be unable to generate revenues and become profitable. WE INTEND TO MARKET OUR PRODUCTS IN INDUSTRIES WHERE TECHNOLOGY CHANGES RAPIDLY, AND WE WILL INCUR COSTS TO KEEP OUR PRODUCTS CURRENT AND INNOVATIVE. OUR FAILURE TO DO SO COULD RENDER OUR PRODUCTS OBSOLETE, MAKING OUR BUSINESS UNPROFITABLE. We hope to market our products in industries characterized by rapid change due to the introduction of new and emerging technologies. Critical issues concerning the governmental or commercial use of chemical detection mechanisms, including security, reliability, accuracy, cost, ease of use, accessibility, or potential 15 tax or other government regulation, may affect the relevance and functionality of our products. Future technology or market changes may cause some of our products to become obsolete more quickly than expected. We will need to make research and development expenditures to create new features for our products to enhance their effectiveness and become and remain competitive. If we are unsuccessful in timely assimilating development changes in the various environments, we may be unable to achieve or maintain profitability. POTENTIAL DEFECTS AND PRODUCT LIABILITY COULD RESULT IN DELAYS IN MARKET ACCEPTANCE, UNEXPECTED LIABILITY AND COSTS AND DIMINISHED OPERATING RESULTS. Technology-based products frequently contain errors or defects, especially when first introduced or when new versions are released. Defects and errors could be found in current versions of our products, future upgrades to current products or newly developed and released products. These defects could result in product liability suits, delays in market acceptance or unexpected redevelopment costs, which could cause any profits we might otherwise have to decline. We anticipate most of our agreements with customers will contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that we will be unable to negotiate such provisions with certain customers or that these provisions, if negotiated, may not be valid as a result of federal, state, local or foreign laws or ordinances or unfavorable judicial decisions. A successful product liability claim could damage our business, operating results and financial condition. Prior to the actual licensing of our technologies for use in distributed products or the entry of our products made by us into the market, we plan to procure product liability insurance. Although we have researched policies for such insurance, we currently have none in place, and we cannot be certain that the amount or extent of coverage will be adequate once we obtain it. OUR POTENTIAL FUTURE BUSINESS AND/OR TECHNOLOGY ACQUISITIONS MAY BE UNPREDICTABLE AND MAY CAUSE OUR BUSINESS TO SUFFER. CDEX intends to expand its operations through the acquisition of additional technologies (either by purchasing other businesses or acquiring their technological assets) which it perceives to be unexploited and develop products based upon these technologies. We have not yet identified these specific technologies, and some of these technologies may be outside our current field of operations. However, we may be unable to identify any such businesses or technologies. Expansion may involve a number of special risks, including possible adverse effects on our operating results or balance sheet (particularly in the event of impairment of acquired intangible assets), diversion of management attention, inability to retain key personnel, risks associated with unanticipated events, any of which could prevent us from becoming profitable. In addition, if competition for acquisition candidates or technologies were to increase, the cost of acquiring businesses or technologies could increase as well. If we are unable to implement and manage our expansion strategy successfully, our business may suffer or fail. SUBSTANTIAL COMPETITION MAY LIMIT OUR ABILITY TO SELL PRODUCTS AND THEREBY OUR CHANCES OF BECOMING PROFITABLE. We may experience substantial competition in our efforts to locate and attract customers for our products. We are aware of two significant competitors in the explosives detection industry which we believe have greater experience, resources and managerial capabilities and may be in a better position than we are to obtain access to and attract customers. A number of larger companies similarly may enter some or all of our target markets and directly compete with us. In the counter-terrorism arena, it is difficult to assess our competition due to the high level of secrecy and lack of available information with respect to defense and homeland security contracts and contractors. We must assume that the demand for the technology in this area has given rise to a corresponding supply of scientists and others who are developing technology similar to, or otherwise competitive with ours. In the area of brand protection, many companies may seek to develop technology in-house to protect their own brands rather than contract with us for our technology. In the areas of medical and pharmaceutical validation and brand protection, various existing technologies compete with ours and already are in use in the marketplace. These include radio frequency identification tags, taggant agents (chemical agents added to the target substance to serve solely as identifying tags) and bar coding. If our competitors are more successful in marketing their products, we may be unable to achieve or maintain profitability. LOSS OF ANY OF OUR CURRENT MANAGEMENT OR INABILITY TO RECRUIT AND RETAIN QUALITY PERSONNEL COULD ADVERSELY IMPACT OUR BUSINESS AND PROSPECTS. OUR DIRECTORS AND OFFICERS EXERT SUBSTANTIAL CONTROL OVER OUR BUSINESS AND OPERATIONS. We are dependent on our officers and other key personnel, and the loss of any of our key personnel could materially harm our business because of the cost and time necessary to retain and train a replacement. Such a loss would also divert management attention away from operational issues. This would increase costs and prevent or reduce our profits. 16 OUR MANAGEMENT LACKS EXPERIENCE IN THIS MARKET. Although widely experienced in other industries, our current senior management team has little experience leading the development, marketing and sales of technology products in the chemical detection and validation marketplace. This lack of experience could lead to inefficiency and slow the process of marketing our products and prevent us from making sales or becoming profitable. ITEM 7. FINANCIAL STATEMENTS The financial statements begin on Page F-1 following Item 14 hereof. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 8A. CONTROLS AND PROCEDURES Management is responsible for establishing and maintaining adequate internal control over financial reporting of our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. As defined by the Public Company Accounting Oversight Board's Auditing Standard No. 2, a material weakness is defined as a significant deficiency or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of the year ended October 31, 2006, an evaluation was carried out under the supervision of James Griffin, our former President, Chief Executive Officer and Principal Accounting and Financial Officer, and with the participation of our management at that time, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). The Company concluded that, as of October 31, 2006, these disclosure controls and procedures were ineffective. Specifically, the Company identified a material weakness in revenue recognition for bill and hold transactions. In fiscal 2006, the Company sold and delivered Valimed (TM) units to Baxa which requested the units to be held at the Company's facility in Arizona, pending shipping instructions from Baxa's end-user customer. The Valimed (TM) units were paid for and revenue was reported in the company's second and third quarter 10QSB filings. Upon further review, and in consultation with its independent auditor and the SEC, the Company concluded on January 29, 2007 to revise its accounting procedure for such transactions and recognize revenue only at such time as the Company receives a fixed schedule for delivery from its customer. As a result of the material weakness discussed above, the Company filed amended 10QSB reports for the fiscal quarters ended April 30 and July 31, 2006, which reflect restated quarterly revenue and cost of revenue balances. Remediation Plan In addition to controls and procedures consistent with prior practices, we developed and implemented a remediation plan. In order to remediate the aforementioned material weakness, we expanded our accounting policy for revenue recognition of bill and hold transactions (see Revenue Recognition in Management's Discussion and Analysis of Financial Condition or Plan of Operation in this report). Further, we have established fixed delivery dates for Valimed (TM) units at our Arizona facility. We believe we have improved our disclosure controls and procedures and remediated the identified material weakness. Management of the Company will continue to evaluate the effectiveness of our disclosure controls and procedures. Because of the inherent limitations in all control systems, controls can provide only reasonable, not absolute, assurance that all control issues and instances of fraud, if any, will be or have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitation in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Changes in Internal Controls Over Financial Reporting The Company implemented the remediation plan discussed above, in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rules 13a-15(f) or 15d-15(f) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 17 ITEM 8B. OTHER INFORMATION None. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information regarding our executive officers and directors: NAME AGE POSITION --------- ----- -------- James Griffin 57 CEO/President, Director (1) Timothy Shriver 56 Sr. Vice President of Technical Operations, Director (1) Dr. BD Liaw 69 Chairman of the Board of Directors George Dials 61 Director Donald W. Strickland 57 Director (1) Effective December 28, 2006, Mr. Griffin resigned from the position of CEO/President and from the Board of Directors. Mr. Shriver was appointed to the position of CEO/President. The following is a summary of the business experience of each of our executive officers and directors: Effective January 1, 2006, Mr. James O. Griffin, became our President & Chief Executive Officer, and on February 3, 2006 was appointed to serve as a director. Mr. Griffin has served in senior executive positions in the high technology security and defense electronic systems industries for more than 25 years. Throughout his career, Mr. Griffin has focused on commercializing emerging technologies--growing sales and establishing productive distribution channels. Mr. Griffin joined CDEX in 2005, originally as Chief Operating Officer, from a background in both public and private enterprises in the U.S., with extensive experience establishing and heading the international business units of several multinationals, including SenTech, Simplex, and Cardkey Systems. Immediately preceding CDEX, at Cernium, Inc., Mr. Griffin served as Vice President of Federal Systems Sales where he founded the company's Washington, DC office, and opened relationships with government agencies for the developer of security video analytics systems. Previously, as Vice President and General Manager for the IPIX Corporation, he launched the company's security division, IPIX Security, and established a customer base that included the 2004 G-8 Summit for the IPIX line of mission critical security imaging systems. As Managing Director of Simplex Asia Ltd., Mr. Griffin led a nearly two-year transformation of the fire alarm manufacturer's Asian operations and reversed a major operating loss. Under Mr. Griffin's leadership, the security services division of Mosler Inc. added contracts with the New York Port Authority to upgrade the security systems in the three airports serving New York City. For Cardkey Systems, Mr. Griffin created the company's international division, linking together worldwide distributors to form cohesive sales channels. Mr. Griffin holds an MBA from Pepperdine University and a B.S. in Electrical Engineering from California State University. Timothy Shriver has served as our Senior Vice President of Technical Operations since July 2001. From 1999 until 2001 Mr. Shriver provided outside consulting services to Ontario Hydro-Generation and CAMOCO, a large uranium mining and processing company. Mr. Shriver's consulting focused on overall business practices with particular emphasis on the implementation of quality assurance programs and evaluation of management capabilities and practices. From 1997 to 1999, Mr. Shriver served as Director of Performance Assurance for Ontario Hydro-Generation (OPG), where he developed and managed the implementation of the overall Quality Program at OPG's three CANDU sites and OPG auxiliary sites supporting the Nuclear Program (at that time, the largest in North America). His activities also included responsibility for the development and implementation of an integrated Corrective Action Program, a performance based Audit and Assessment program and the development of a process oriented Quality Assurance Manual including the establishment and maintenance of the required interface with the federal regulator to obtain approval. Between OPG and CDEX, Mr. Shriver consulted for other utilities' quality assurance programs. Dr. BD Liaw has served as a director of CDEX since October 2001 and became Chairman of the Board in February 2006. Since January 2003, he has also served as Managing Director - Energy Services for Dynamic Resolutions LLC, performing consulting services to international utilities in Asia. Dynamic Resolutions is not affiliated with CDEX. From July 1995 to October 2002, he served as an Advisor and from September 1996 to March 2001, as an Executive Director, to Taiwan Power Co., an electrical utility. Dr. Liaw served for over 20 years at the U.S. Nuclear Regulatory Commission and its predecessor agency, the Atomic Energy Commission. His work related to the high-level nuclear waste repository and low-level waste projects. In 1986 and 1987, he was invited by China and Taiwan, respectively, to visit Mainland China and Taiwan to assist in establishing their nuclear safety regulatory programs. In 1985 thru 1990, Dr. Liaw managed the NRC's regulatory oversight of the Tennessee Valley Authority's (TVA) nuclear program, and was instrumental in bringing TVA's nuclear program back to full regulatory compliance. Dr. Liaw represented the NRC in many meetings, conferences and symposiums in the United States and around the world on a wide range of issues. In 1994, Dr. Liaw accepted an invitation from the government of Taiwan to visit and help resolve some legislators' concerns 18 regarding energy issues facing the country. Subsequently in 1995, Dr. Liaw accepted a request to return to Taiwan as an advisor to the Ministry of Economic Affairs. Dr. Liaw also served in a number of positions over the past six years, including as an advisor to the Industrial Technology Research Institute. Mr. Dials has been a director of CDEX since July 2001. Mr. Dials is currently the Chief Operating Officer of Waste Control Specialists, a chemical waste repository. From July 2002 until May 2003, Mr. Dials was President and CEO of LES, LLC a company seeking a license to build a nuclear fuel enrichment facility. From February 2001 to June 2002, Mr. Dials served as Senior Vice President of Consulting Services for Science and Engineering Associates responsible for its Consulting Services line of business, where he provided executive level direction in corporate mergers and acquisitions in the consulting area. Mr. Dials managed the engineering, and scientific studies of Yucca Mountain as a potential geologic repository for spent nuclear fuel and high-level radioactive waste. Responsibilities include scheduling and cost performance, technical and administrative performance, strategic operations plan development, and resource allocation for a $250 million project. Mr. Dials received a B.S. in Engineering in 1967 from West Point and Masters Degrees in Political Science and Nuclear Engineering from the Massachusetts Institute of Technology. He served in the U.S. Army for 10 years, and was awarded the Silver Star and Bronze Star for Valor. Mr. Donald W. Strickland was appointed to serve as a director in February 3, 2006. He comes to CDEX from a 30-year career in successfully developing businesses internationally for both large public companies and technology startups. He has held executive positions at Eastman Kodak Company and Apple Computer, including heading product development, manufacturing, and sales. In 1996 he became CEO of PictureWorks Technology, a technology start up, which he sold for $200M in 2000 to IPIX Corporation, a public company traded on the NASDAQ exchange. Thereafter, he served as President and CEO of IPIX through 2004, during which time he led the company through a major restructuring, focusing on the security markets and taking the company to profitability. Mr. Strickland holds a bachelor's degree in physics from Virginia Tech, a master's degree in physics from the University of Notre Dame, a master's degree in optics from the University of Rochester, a master's degree in management from the Stanford University and a law degree from George Washington University. SIGNIFICANT EMPLOYEE/CONSULTANT In addition to our executive officers and directors, Dr. Wade Poteet, our Principal Scientist, is a significant consultant of CDEX. Dr. Poteet resigned from his employment position with the company in January 2006 and now serves on a full-time consultancy basis continuing as the company's Principal Scientist. For the past 30 years, Dr. Poteet has held Senior Management positions in small entrepreneurial engineering firms. He has served as our Principal Scientist since July 2001. From July 2001 until January 2003, Dr. Poteet was a member, and served as Principal Scientist, of Dynamic Management Resolutions LLC, providing scientific, management and engineering services. Dynamic Management Resolutions was a consulting company that provided technical and management services on a contract basis to CDEX and CDEX Delaware. From May 1999 to July 2001, Dr. Poteet served as President/Principal Scientist for CP Systems, Inc., a private company that, at that time, built large observatory-class telescopes and. marketed and distributed recreational global positioning units. At CP Systems, Dr. Poteet directed contract research in remote sensing in the x-ray and ultraviolet regions, including landmine, anti-terrorist and drug detection programs, and provided research and development for nanometrology technologies. From 1971 to May 1999, Dr. Poteet served as Vice President/Principal Scientist for System Specialists, Inc., where he directed all research and development, including NASA airborne projects and advanced instruments for commercial and government programs. Dr. Poteet received his Ph. D. in 1970 in Experimental Solid State Physics from Virginia Polytechnic Institute (VPI) (Thesis topic: Nuclear Quadrupole Resonance in Superconductors). His M.S. in Physics is also from VPI, in 1968 (Thesis topic: Nuclear Magnetic Resonance in Superconductors). SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The officers, directors and 10% stockholders of CDEX timely filed all reports subject to the reporting requirements of Section 16(a) during the fiscal year ended October 31, 2006. CODE OF ETHICS CDEX Inc. CODE OF ETHICS The Board of Directors has adopted this Code of Ethics to guide the conduct of its directors, officers and employees in the conduct of the Company's business and financial dealings. All directors, officers and employees of the Company are expected to be familiar with this Code of Ethics and to adhere to and apply the principles and procedures set forth herein. The Company has designated Dr. B.D. Liaw as the Code of Ethics Contact Person for allegations dealing with officers and directors and Tim Shriver as the Code of Ethics Contact Person for allegations dealing with other CDEX employees. Should you have any questions or concerns or wish to discuss a possible violation of this Code of Ethics, you should contact Dr. Liaw or Tim Shriver 301 881 0800 and 520-514-6393, respectively. 19 The general purposes of this Code of Ethics are as follows: o To create a corporate culture and business environment in which the legitimate interests of stockholders, employees, customers and suppliers and other stakeholders are all fairly and openly represented and in which all feel, as far as possible, they are treated fairly. o To promote honest, open, candid and ethical conduct, including fair dealing and the ethical handling of actual or apparent conflicts of interest; o To promote full, fair, accurate, timely and understandable financial and other disclosure; o To promote compliance with applicable laws and governmental rules and regulations; o To ensure the protection of the Company's legitimate business interests, including corporate opportunities, assets and confidential information; and o To deter wrongdoing and, when it occurs, detect and swiftly deal with it and its consequences for the company's stakeholders fairly. Set forth below are the specific rules governing the conduct of directors, officers and employees which form the substance of this Code of Ethics. Each director, officer and employee should read them carefully and commit to upholding them in the pursuit of the Company's business and financial affairs. I. Honest and Candid Conduct Each director, officer and employee must act with integrity, including being honest and candid while still maintaining the confidentiality of information in compliance with the Company's policies for the handling of confidential information as outlined in more detail in the company's standard non disclosure and non compete agreements. In addition, each director, officer and employee must adhere to the highest standard of business ethics and observe the letter, form and spirit of state and federal laws, as well as governmentally mandated accounting standards and other rules and regulations. II. Conflicts of Interest/Corporate Opportunities A "conflict of interest" arises when an individual's personal interest or position in the corporate management structure interferes with or is inconsistent with the interests of the Company or with the carrying out their duties in the best interests of the Company. A conflict of interest can arise when a director, officer or employee takes any action outside the Company or has any interest outside the Company that may make it difficult to perform his or her work for the Company objectively and effectively. Even the appearance of such a situation may create a conflict of interest. Any director, officer or employee contemplating a material transaction or relationship which could reasonably be expected to give rise to a conflict of interest, or the appearance of a conflict of interest, should discuss it with the Code of Ethics Contact Person prior to taking any action. Service to the Company should never be subordinated to personal gain and advantage. Conflicts of interest must be avoided and when detected they must be reported and action taken to relieve them immediately upon detection. The following are examples of potential cases of conflict of interest. This list, however, is by no means exhaustive: o Significant ownership or other financial interest in any supplier or customer of the Company; o Any consulting, employment or other financial relationship with any supplier, customer or competitor of the Company; o Any outside business activity which detracts from an individual's ability to devote an appropriate amount of time and/or attention to the Company; o Using company assets or influence for personal use or benefit; o Receipt of non-nominal gifts of excessive entertainment from any company with which the Company has current or prospective business dealings or from supervised employees; o Selling anything to the Company or buying anything from the Company, other than on similar terms and conditions as would prevail in an arms-length transaction; or o Actions that would present a conflict for a director, officer or employee if taken by a family member with knowledge of the director, officer or employee. Directors, officers and employees of the Company are prohibited from taking (directly or indirectly) a business opportunity that is discovered through the use of corporate property, information or position, unless the Company has approved in writing or been offered the opportunity and declined it. Any director, officer or employee contemplating such a transaction or business opportunity should first discuss it with the appropriate Code of Ethics Contact. Simply put, it is imperative that all put the company's interest first. While a more comprehensive discussion of the Company's sexual harassment or racial prejudice policy will be discussed in the Company's Employee Manual, in short, the Company will not be tolerated such action or the failure to report to the appropriate Code of Ethics Contact such action, both of which will dealt with equally. 20 III. Disclosure Every director, officer or employee who is directly involved in the Company's financial affairs or decision-making or is part of the Company's SEC/public disclosure process must be familiar with and comply with the Company's disclosure controls and procedures and internal control over financial reporting, to the extent relevant to his or her area of responsibility. This also extends to ensuring that the Company's public disclosure documents filed with the SEC comply in all material respects, with the applicable securities laws and SEC rules and regulations. Such persons should consult with other Company officials with the goal of making full, fair, timely, accurate and understandable disclosure. Such persons must properly review and critically analyze proposed disclosure for accuracy and completeness and must not knowingly misrepresent, or cause others to misrepresent, facts about the Company to others, including the Company's independent auditors, counsel or governmental or self-regulatory organizations (such as the NASD). IV. Compliance It is the personal responsibility of each director, officer and employee to uphold the Company's policy of complying with all applicable laws, rules and regulations and to adhere to the standards and restrictions imposed thereby. It is against Company policy and, in many circumstances, illegal for a director, officer or employee to profit from undisclosed, nonpublic Company information. This includes trading in the Company's securities (either directly or indirectly) while in possession of material nonpublic information relating to the Company. Any director, officer or employee who is uncertain about the legality of a purchase or sale or business relationship or witnesses a violation of this code, should immediately consult with the Code of Ethics Contact Person who will, if appropriate, discuss the matter with the board of directors and/or Company counsel. V. Reporting and Accountability The Code of Ethics Contact Person will report all potential violations of this Code of Ethics to the Company's CEO. With respect to allegations of Code of Ethics violations related to employees who are not officers or directors, the CEO will be responsible for directing an appropriate investigation and, in conjunction with the Code of Ethics Contact Person for Employees, administering appropriate corrective actions. The board of directors will be responsible for directing an appropriate investigation and administering appropriate corrective action with respect to allegations of Code of Ethics violations related to officers or directors of the Company. The Company's board of directors is responsible for final interpretation of the Code of Ethics. The Company will not tolerate any delay in or failure to report or any retaliation against any other director, officer or employee who, in good faith, reports any existing or potential violation of this Code of Ethics. If a violation has occurred, the Company will take such disciplinary or preventive action as it deems appropriate. In certain cases, this may involve dismissal or notification of appropriate governmental authorities for appropriate prosecution or other action. VI. Waiver From time to time, the Company may waive one or more provisions of this Code of Ethics. But this can only be done in writing. Any request for a waiver of any provision of this code must be in writing and addressed to the board of directors. Prior to submitting a request for a waiver, you should consult with the appropriate Code of Ethics Contact Person. In certain cases, waivers of this Code of Ethics must be reported on Form 8-K to the Securities and Exchange Commission. 21 ITEM 10. EXECUTIVE COMPENSATION The following table sets forth information regarding the remuneration of our executive officers:
ANNUAL COMPENSATION LONG TERM COMPENSATION -------------------------------- -------------------------------------- AWARDS PAYOUTS ------------------------- ----------- RESTRICTED SECURITIES NAME AND PRINCIPAL FISCAL CASH OTHER ANNUAL STOCK UNDERLYING ALL OTHER POSITION YEAR SALARY(1) BONUS COMPENSATION(1) AWARDS OPTIONS COMPENSATION - ------------------------------------------------------------------------------------------------------------------- Timothy D. Shriver 2006 $ 163,690 - $ 30,290 - - - CEO, President 2005 $ 96,000 - $ 156,000 - - - Former Sr. VP Technical Operations 2004 $ 96,000 - $ 156,000 - - - James Griffin 2006 $ 191,573 - $ 19,417 - (300,000) (2) - Former CEO, President 2005 $ 11,667 - $ 8,333 - 300,000 (2) - Malcolm Philips 2006 $ 16,000 - $ 349,000 - - - Former CEO, President 2005 $ 96,000 - $ 204,000 - - - 2004 $ 96,000 - $ 204,000 - - -
(1) Pursuant to the terms of their Executive Services Agreements and based upon CDEX's financial condition, the executive officers have each foregone a portion of his stated salary, and has been paid instead in the form of cash and shares of common stock. All share amounts are subject to a vesting schedule with a risk of forfeiture in the event the employee does not remain with CDEX for the required amount of time. See discussion under Employment Agreements below for greater detail on the terms of employment including compensation. (2) Represents options to purchase 300,000 shares of Class A Common Stock granted in 2005, which were canceled in 2006. REMUNERATION OF KEY EMPLOYEES WHO ARE HIGHLY COMPENSATED In addition to our executive officers and directors, we have one key employee in fiscal year 2006:
ANNUAL COMPENSATION LONG TERM COMPENSATION -------------------------------- -------------------------------------- AWARDS PAYOUTS ------------------------- ----------- RESTRICTED SECURITIES NAME AND PRINCIPAL FISCAL CASH OTHER ANNUAL STOCK UNDERLYING ALL OTHER POSITION YEAR SALARY(1) BONUS COMPENSATION(1) AWARDS OPTIONS COMPENSATION - ------------------------------------------------------------------------------------------------------------------- Dr. Wade Poteet 2006 $ 16,000 - $ 19,000 - - - Principal Scientist 2005 $ 96,000 - $ 114,000 - - - 2004 $ 96,000 - $ 114,000 - - -
(1) Pursuant to the terms of his Employment Agreement and based upon CDEX's financial condition Dr. Poteet has foregone all or a portion of his stated salary, and instead is compensated in the form of cash and in shares of common stock. All share amounts are subject to a vesting schedule with a risk of forfeiture in the event the employee does not remain with CDEX for the required amount of time. Dr. Poteet resigned from his employment position with the company effective January 1, 2006 and now serves on a full-time consultancy basis, continuing as the company's Principal Scientist. The compensation above was paid during his period of employment and does not include consultant payments EMPLOYMENT AGREEMENTS The Company entered into employment agreements with Messrs. Philips and Shriver effective January 1, 2002. The agreements each continue for an indefinite period unless terminated by CDEX for "cause," or by the employee for "good reason" (as such terms are defined in the agreements), or upon two weeks prior written notice by either party to the other. The agreements provide for salaries based on annual amounts of $300,000 for Mr. Philips and $250,000 for Mr. Shriver, which are subject to review on an annual basis. The salary shall be payable in equal monthly installments, unless otherwise required by applicable state law and, based on CDEX's economic posture, may be paid in cash and/or stock, at CDEX's option. Each agreement provides for a minimum monthly cash payment to the employee of $7,500 for Mr. Shriver and $3,000 for Mr. Philips. CDEX has availed 22 itself of this option for the past three fiscal years as reflected under "Compensation of Executive Officers." Each of these agreements provides for the forfeiture of restricted stock granted to the employee in the event of the employee's termination before the stock is fully vested. Under the agreements, each employee is entitled to a severance package in the event of termination by CDEX other than for "cause" or by the employee for "good reason." In each case, "good reason" includes a change in management of CDEX. The agreements with Messrs. Philips and Shriver were amended on January 1, 2003 to increase the intended minimum monthly cash payment to the employee to $8,000, and permit CDEX to pay the entire salary in common stock if paying cash is not in the best interest of the Company. Mr. Philips resigned from the positions of Chief Executive Officer and President effective January 1, 2006, and the company entered into a Settlement and Consulting Agreement, as of said date, with an entity controlled by Mr. Philips, for Mr. Philips's continued services as the Company's Chairman of the Board and additional services as a consultant in order to assure a smooth and settled transition for the Company's new Chief Executive Officer. The agreement has a term of one year, unless extended by mutual agreement of the parties, and may be terminated by either party on two weeks' notice. Pursuant to the agreement, the Company paid Mr. Philips 350,000 free-trading shares of Class A Common Stock. Mr. Philips' agreement was terminated in April 2006. Effective January 11, 2006, the Company entered into an amendment to the employment agreement of Mr. Shriver. The amendment to Mr. Shriver's employment agreement provides for an annual cash salary of $180,000 as well as options which will vest 1/3 on January 1, 2007, and 1/24th of the remainder on the first day of each month thereafter for the following two years, as long as he is providing to the Company substantial services pursuant to a contract with the Company at the time of vesting. The Company canceled all options granted to Mr. Shriver in 2006. The Company entered into an employment agreement with Mr. Griffin effective October 1, 2005. The agreement provides for an annual salary of $240,000 which may be paid in combination of cash and stock at the Company's discretion, and a discretionary annual performance bonus of 25% of the annual salary. Further, the agreement provides for options to purchase 300,000 shares of Class A Common Stock, 1/3 of which will vest on September 30, 2006, with 1/24th of the balance vesting on the first day of each month (commencing November 1, 2006) for the two years thereafter. Unless otherwise stated in the Company's Stock Option Plan, the Stock Options must be exercised within two years of their vesting date. In the event of a change of control in the Company (which shall be the sale of more than 50% of the Registrant), all unvested Stock Options shall immediately vest, effective as of the date of such change in control. The agreement continues for an indefinite period unless terminated by CDEX for "cause," or by Mr. Griffin for "good reason" (as such terms are defined in the agreements), or upon two weeks prior written notice by either party to the other. The agreement provides that Mr. Griffin's employment will be "at-will" and may be terminated upon two weeks written notice by either party. Effective January 11, 2006, the Company entered into an amendment to the employment agreement of Mr. Griffin. The amendment provides for payment to Mr. Griffin of an annual cash salary of $204,000 as well as options which will vest 1/3 on January 1, 2007, and 1/24th of the remainder on the first day of each month thereafter for the following two years, as long as he is providing to the Company substantial services pursuant to a contract with the Company at the time of vesting. The Company canceled all options granted to Mr. Griffin in 2005 and 2006. Effective December 28, 2006, Mr. Griffin resigned from the position of CEO/President and from the Board of Directors. STOCK INCENTIVE PLANS 2002 Stock Incentive Plan - ------------------------- On May 27, 2002, our board of directors adopted the 2002 Stock Incentive Plan, under which stock options and restricted stock may be granted to such of our officers, directors, employees or other persons providing services to CDEX as our board of directors, or a committee designated by them for this purpose, selects. The plan was approved by our stockholders on July 1, 2002. Stock options granted under the plan may be nonqualified stock options or incentive stock options, as provided in the plan. Incentive stock options are to be issued in accordance with Section 422 of the Internal Revenue Code of 1986, as amended. As such, they may only be issued to employees of CDEX or any subsidiary of CDEX, and must have an exercise price of no less than 110% of fair market value of the common stock on the date of the grant. The aggregate fair market value of the underlying shares cannot exceed $100,000 for any individual option holder during any calendar year. Also, incentive stock options must expire no later than five years from the date of grant. Non-incentive options are not subject to the restrictions contained in Section 422, except that pursuant to the plan, such options cannot be exercisable at less than 85% of fair market value and must expire no later than ten years from the date of grant. The options are non-transferable and may not be assigned except that non-incentive options may, in certain cases be assigned to family members of the grantee. 23 Upon termination of the employment (other than for cause) of a grantee of options under this plan, the grantee shall have 60 days following such termination, or one year if such termination results from the grantee's death or disability (as defined in the plan), to exercise the vested portion of any option. Holders of options under the plan have no voting or other rights of shareholders except and to the extent that they exercise their options and are issued the underlying shares. Options under the plan may be exercised by the issuance of a promissory note from the grantee, or on a cashless basis by the grantee surrendering a portion of the shares issuable thereunder, as payment of the exercise price in lieu of cash. Restricted stock granted under this plan may be issued subject to any restrictions set by our board of directors in its discretion except that the vesting restrictions for restricted stock granted to individuals who are not officers, directors or consultants of CDEX shall lapse no less rapidly than the rate of 20% per year for each of the first five years from the grant date. However, the board of directors in its discretion may shorten or eliminate the restrictions. Generally, unless otherwise provided by the board of directors with respect to a particular grant of restricted stock, holders of restricted stock have the right to vote and receive dividends on their shares, including shares not yet vested. Also, unless otherwise so provided, any unvested shares are deemed forfeited by the grantee upon termination of such grantee's service with CDEX. 2003 Stock Incentive Plan - ------------------------- On July 1, 2003, our shareholders adopted the 2003 Stock Incentive Plan, which has substantially the same terms as the 2002 Stock Incentive Plan. We have reserved 10,000,000 shares in the aggregate for issuance under both the 2002 and 2003 plans, including 3,000,000 available for the Board of Directors to allocate to the Incentive Plan at their discretion as approved by the Shareholders at our June 2004 Annual Meeting. To date, we have issued 9,758,043 shares of common stock under the plans to certain of our officers, directors, consultants and employees, which are subject to forfeiture in accordance with the vesting schedules set forth in the granting agreements. Shares issued pursuant to the plans, whether underlying options or as restricted stock, generally may not be sold or transferred without the grantee first offering CDEX a right of first refusal to purchase the shares sought to be sold. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth the stock ownership of: (i) each person known by us, as of the date of this report, to be the beneficial owner of five percent (5%) or more of our common stock, (ii) each executive officer and director, individually, and (iii) our executive officers and directors as a group. Each person has sole voting and investment power with respect to the shares shown, unless otherwise indicated.
Name and Address of Amount of Beneficial Beneficial Owner(1) Position Title of Class Ownership Percent of Class - --------------------------------------------------------------------------------------------------------------------------------- Malcolm H. Philips, Jr. Former Executive Officer and Director Class A Common 2,635,500 (2) (3) 7.08% James Griffin Former Executive Officer and Director Class A Common 27,750 (2) 0.07% Timothy Shriver Executive Officer and Director Class A Common 1,259,322 (2) 3.38% George Dials Director Class A Common 180,000 (2) (4) 0.48% Dr. BD Liaw Director Class A Common 175,000 (2) (4) 0.47% Donald W. Strickland Director Class A Common - 0.00% - --------------------------------------------------------------------------------------------------------------------------------- Shares of all named executives, significant employees and directors as Class A Common 4,277,572 11.48% a group (6 persons)
(1) The address for each of the listed persons is c/o CDEX Inc., 1700 Rockville Pike, Suite 400, Rockville, Maryland 20852. (2) The stock granted to each of the above-named directors and executive officers may be subject to a vesting schedule and risk of forfeiture. CDEX has the option to require that any unvested shares at termination be forfeited. Upon termination of employment/provision of service, CDEX has the option to purchase any vested shares of the employee/service provider at fair market value. (3) Includes stock held by entities in which Mr. Philips has a controlling interest. 24 (4) Each of Mr. George Dials and Dr. BD Liaw, as a director, was provided shares of common stock under the terms of such director's Services Agreement with CDEX as well as a stock bonus in 2002. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The spouse of a former Chief Executive Officer (Mr. Phillips) purchased a $62,000 convertible note in 2005 paying interest at 9%. Total interest expense paid to this related party was $483 for the year ended October 31, 2005. The $62,000 note was redeemed at par value for cash in March 2005. PART IV ITEM 13. EXHIBITS 3.1 Amended and Restates Articles of Incorporation of the Company filed January 2, 2004, together with Certificate of Designation of Rights, Preferences and Privileges(1) 3.2 By-Laws of the Company adopted July 6, 2001(1) 4.1 Specimen certificate for shares of Company common stock (3) 4.2 2002 Stock Incentive Plan(1) 4.3 2003 Stock Incentive Plan(1) 4.4 Form of Securities Purchase Agreement(3) 10.1 Business Identity Program Agreement by and between the Company and Source Office Suites, dated as of October 17, 2001(3) 10.2 Lease Agreement by and between the Company and Butterfield Center Limited Partnership (assigned from Dynamic Management Resources), as amended on March 4, 2004(2) 10.3 Assigned Consultant Services Agreement for Dr. Wade Poteet Restated as Employment Agreement dated January 1, 2003 and amendments(2) 10.4 Assigned Consultant Services Agreement for Malcolm Philips Restated as Employment Agreement dated January 1, 2002 and amendments(2) 10.5 Assigned Consultant Services Agreement for Timothy Shriver Restated as Employment Agreement dated January 1, 2002 and amendments(2) 10.6 G. Dials Services Agreement dated August 3, 2001(3) 10.7 Dr. BD Liaw Services Agreement dated October 1, 2001(3) 10.8 Form of Non-Disclosure Agreement between the Company and each significant employee(3) 10.9 Form of Employment Agreement(3) 10.10 Employment Agreement for James Griffin dated as of October 1, 2005 10.11 Amendment to Lease Agreement by and between the Company and Butterfield Center Limited Partnership dated April 25, 2005. 10.12 Consulting and Severance Agreement by and between the Company and Malcolm H. Philips, Jr. 25 31 Rule 13a-14(a)/15d-14(a) Certification of Timothy Shriver. 32 Section 1350 Certification of Timothy Shriver. (1) Incorporated by reference to the Company's Registration Statement on Form SB-2, as filed with the Securities and Exchange Commission on February 2, 2004. (2) Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form SB-2, as filed with the Securities and Exchange Commission on May 5, 2004. (3) Incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form SB-2, as filed with the Securities and Exchange Commission on June 21, 2004. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following is a summary of the fees billed to us by Aronson and Company, our independent auditors, for audit and professional services rendered for the fiscal years ended October 31, 2006 and 2005: Description FY2006 FY2005 ----------- ------ ------ Audit fees $ 58,000 $ 59,300 Other services 15,600 38,200 ------ ------ Total $ 73,600 $ 97,500 -------- -------- 26 CDEX Inc. Index to Audited Financial Statements Years Ended October 31, 2006 and 2005 - -------------------------------------------------------------------------------- Page Report of Independent Registered Public Accounting Firm.......................F2 Audited Financial Statements: Balance Sheet..............................................................F3 Statements of Operations...................................................F4 Statement of Changes in Stockholder's Equity...............................F5 Statements of Cash Flows...................................................F6 Notes to Financial Statements..............................................F7 F-1 Report of Independent Registered Public Accounting Firm Board of Directors CDEX Inc. Rockville, Maryland We have audited the accompanying Balance Sheet of CDEX Inc. as of October 31, 2006, and the related Statements of Operations, Stockholders' Equity and Cash Flows for the years ended October 31, 2006 and 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CDEX Inc. as of October 31, 2006, and the results of its operations and its cash flows for the years ended October 31, 2006 and 2005 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company incurred net losses in each year of operations, has an accumulated deficit in excess of $23 million as of October 31, 2006, has insufficient working capital to sustain its operations over the next year and has no committed borrowing arrangements. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 9. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Aronson & Company Rockville, Maryland January 29, 2007 F-2 CDEX Inc. Balance Sheet as of October 31, 2006
Assets Current assets Cash and cash equivalents $ 56,328 Accounts receivable 10,519 Finished goods inventory 263,036 Raw materials inventory 27,997 ------------ Total current assets 357,880 Property and equipment Laboratory and computer equipment 639,437 Furniture and fixtures 1,666 Building improvements 1,265 ------------ Total property and equipment 642,368 Less: Accumulated depreciation (595,168) ------------ Net property and equipment 47,200 Patent 50,000 Other assets 2,499 ------------ Total Assets $ 457,580 ============ Liabilities and Stockholders' Equity Current Liabilities Accounts payable and accrued expenses $ 973,235 Notes payable 204,333 Deferred stock compensation 65,500 Advance payments 36,968 Deferred revenue 638,000 Deferred rent 6,362 ------------ Total Current Liabilties 1,924,398 Redeemable preferred stock liability 22,500 ------------ Total Liabilities 1,946,898 Commitments and Contingencies Stockholders' Deficit Preferred Stock - Undesignated - $.005 par value per share, 350,000 shares authorized and none outstanding - Preferred Stock - Series A - $.005 par value per share, 150,000 shares authorized and 6,675 outstanding 33 Class A common stock - $.005 par value per share, 50,200,000 shares authorized and 37,245,409 outstanding 186,232 Additional paid in capital 21,498,550 Accumulated deficit (23,174,133) ------------ Total Stockholders' Deficit (1,489,318) ------------ Total Liabilities and Stockholders' Deficit $ 457,580 ============
The accompanying Notes to Financial Statements are an integral part of these financial statements. F-3 CDEX Inc. Statements of Operations
Year Ended October 31 2005 2006 ---------------- ----------------- Revenue $ 178,607 $ 283,385 Cost of Revenue 85,481 141,080 ---------------- ----------------- Gross Profit 93,125 142,305 Operating Expenses Development costs 2,421,875 1,298,594 General and administrative expenses 2,896,336 2,222,208 ---------------- ----------------- Total Operating Expenses 5,318,211 3,520,802 Loss From Operations (5,225,086) (3,378,497) Other Income (Expense) Interest income 4,070 7,201 Related party interest expense (483) - Interest expense - (28,807) ---------------- ----------------- Total Other (Expense) Income 3,587 (21,605) ---------------- ----------------- Net Loss $ (5,221,499) $ (3,400,102) ================ ================= Basic and diluted net loss per common share: $ (0.16) $ (0.09) Basic and diluted weighted average common shares oustanding 31,988,808 36,569,497
The accompanying Notes to Financial Statements are an integral part of these financial statements. F-4 CDEX Inc. Statement of Changes in Stockholders' Equity
Shares of Shares of Shares of Class A Class B Preferred Class A Class B Preferred Common Common Stock Common Stock Common Stock Stock Stock Stock - ------------------------------------------------------------------------------------------------------------------------------ Balance, October 31, 2004 29,092,618 220,000 $ 145,468 $ 1,100 - ------------------------------------------------------------------------------------------------------------------------------ Sale of common stock for cash 3,232,366 - 16,161 - Exercise of warrants for common stock 1,190,340 - 5,952 - Conversion of debentures into common stock 296,667 - 1,483 - Shares issued for compensation 1,822,980 - 9,115 - Exchange of Class B for Class A common stock 45,000 (45,000) 225 (225) Remeasurement of compensation expense - - - - Amortization of deferred compensation expense - - - - Net loss - - - - - ------------------------------------------------------------------------------------------------------------------------------ Balance, October 31, 2005 35,679,971 175,000 $ 178,404 $ 875 ============================================================================================================================== Sale of preferred stock for cash 6,675 - - 33 - - Sale of common stock for cash - 457,563 - - 2,288 - Shares issued for compensation - 932,875 - - 4,664 - Exchange of Class B for Class A common stock - 175,000 (175,000) - 875 (875) Remeasurement of compensation expense - - - - - - Amortization of deferred compensation expense - - - - - - Net loss - - - - - - - ------------------------------------------------------------------------------------------------------------------------------ Balance, October 31, 2006 6,675 37,245,409 - $ 33 $ 186,232 $ - ============================================================================================================================== Additional Stock Paid-in Deferred Accumulated Subscription Capital Compensation Deficit Receivable Total - ------------------------------------------------------------------------------------------------------------------------------ Balance, October 31, 2004 $ 14,997,386 $ (161,257)$(14,552,533) $ - $ 430,164 - ------------------------------------------------------------------------------------------------------------------------------ Sale of common stock for cash 2,617,338 - - - 2,633,500 Exercise of warrants for common stock 886,798 - - - 892,750 Conversion of debentures into common stock 87,517 - - - 89,000 Shares issued for compensation 1,726,462 - - - 1,735,577 Exchange of Class B for Class A common stock - - - - - Remeasurement of compensation expense 119,767 (119,767) - - - Amortization of deferred compensation expense - 208,488 - - 208,488 Net loss - - (5,221,499) - (5,221,499) - ------------------------------------------------------------------------------------------------------------------------------ Balance, October 31, 2005 $ 20,435,268 $ (72,536)$(19,774,033) $ - $ 767,978 ============================================================================================================================== Sale of preferred stock for cash - 133,467 - - - 133,500 Sale of common stock for cash - 140,712 - - - 143,000 Shares issued for compensation - 792,733 - - - 797,398 Exchange of Class B for Class A common stock - - - - - - Remeasurement of compensation expense - (3,631) 3,631 - - - Amortization of deferred compensation expense - - 68,906 - - 68,906 Net loss - - - (3,400,102) - (3,400,102) - ------------------------------------------------------------------------------------------------------------------------------ Balance, October 31, 2006 - $ 21,498,550 $ - $(23,174,133) $ - $(1,489,318) ==============================================================================================================================
The accompanying Notes to Financial Statements are an integral part of these financial statements. F-5 CDEX Inc. Statements of Cash Flows
Year Ended October 31 2005 2006 --------------- ---------------- Cash Flows from Operating Activities Net loss $(5,221,499) $(3,400,101) Adjustments to reconcile net loss to cash used by operating activities Depreciation 16,760 23,794 Stock compensation 2,724,578 300,267 Noncash interest - 28,807 Changes in operating assets and liabilities Inventory (105,313) (39,571) Accounts receivable (19,629) 9,110 Prepaid expenses 1,148 2,845 Other assets (1,100) - Current liabilities (7,330) 1,266,097 ----------- ----------- Net cash used by operating activities (2,612,385) (1,808,752) Cash Flows from Investing Activities Capitalized patent costs - (50,000) Purchase of property and equipment (2,108) (36,162) ----------- ----------- Net cash used by investing activities (2,108) (86,162) Cash Flows from Financing Activities Proceeds from sale of preferred stock - 156,000 Proceeds from sale of common stock 3,526,250 143,000 Proceeds from note payable - 180,000 Proceeds from convertible notes payable 89,000 - Proceeds from related party convertible notes payable 62,000 - Repayment of related party convertible notes payable (62,000) - ----------- ----------- Net cash provided by financing activities 3,615,250 479,000 ----------- ----------- Net increase (decrease) in cash 1,000,757 (1,415,913) Cash and cash equivalents, beginning of the period 471,485 1,472,242 ----------- ----------- Cash and cash equivalents, end of the period $ 1,472,241 $ 56,328 =========== =========== Supplemental Cash Flow Information Actual cash payments for interest $ 483 $ - Conversion of convertible notes payable to common stock $ 89,000 $ - Common stock issued in non-cash transactions $ 1,735,577 $ - Conversion of Class B to Class A common stock $ 49,500 $ 18,250
The accompanying Notes to Financial Statements are an integral part of these financial statements. F-6 Notes to Financial Statements 1. Organization Basis of presentation: CDEX Inc. (the Company), incorporated and significant under the laws of the State of Nevada on July 6, 2001 accounting (inception), began operations in July 2001 by acquiring the policies assets listed below along with chemical detection technology, nanometrology, technical processes and intellectual property rights from Loch Harris, Inc. in exchange for 13,865,000 shares of Class A common stock. The transaction is considered a reorganization of affiliated entities and hence the assets acquired are valued at the historical cost of the transferor. As the intangible assets had no historical cost basis on the books of the transferor, they are carried at a zero cost value on the Company's books. Tangible assets acquired were: Cash $ 73,000 Other receivables 7,000 Property and equipment, net 366,099 On March 1, 2002, 200,000 shares issued as described above were returned to the Company in exchange for its payment of $57,000 of liabilities of the transferor related to legal and professional services performed. Use of accounting estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the date of the financial statements and (iii) the reported amounts of revenues and expenses during the periods covered by our financial statements. Actual results could differ from those estimates. Revenue recognition: Revenue is recognized in compliance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, and EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Sales revenues are recognized when persuasive evidence of an agreement with the customer exists, products are shipped or there is a fixed schedule for delivery, title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed or determinable, collectibility is reasonably assured, and there are no significant future performance obligations. Service revenues are recognized at time of performance. Service maintenance revenues are recognized ratably over the term of the agreement. Deferred revenue represents amounts invoiced or received but not recognized as revenue if the above revenue recognition terms are not met. Specifically, the company does not recognize revenue for ValiMed(TM) units purchased by Baxa Corporation that are warehoused at the company's Tucson facility per Baxa's request (commonly referred to as bill and hold transactions). Such transactions represent $588,000 of deferred revenue at October 31, 2006. Further, the company deferred $50,000 from the Missouri State Highway Patrol (MSHP) for the Meth Gun Pilot Test Program as the program was not completed by October 31, 2006. In fiscal years 2005 and 2006, revenue was recognized from sales to 4 and 9 customers, respectively. Sales to Children's Medical Center of Dallas, University of Michigan and University of Utah represented 23%, 30% and 44% of fiscal year 2005 revenue, respectively. Sales to Baxa Corporation and Henry Ford Health Systems represented 60% and 15% of fiscal year 2006 revenue, respectively. F-7 Cash and cash equivalents: The Company maintains cash balances that may exceed Federally insured limits. The Company does not believe that this results in any significant credit risk. The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. Property and equipment: Property and equipment are stated at historical cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from two to seven years. Depreciation expense was $16,760 and $23,794 for the years ended October 31, 2005 and 2006, respectively. Inventory: Inventory is valued at the lower of cost (at standard, which approximates actual cost on a first-in, first-out basis) or market. Inventory includes the cost of component raw materials and manufacturing. Advertising and marketing costs: The cost of advertising and marketing is expensed as incurred. Advertising and marketing expense was $52,142 and $109,897 for the years ended October 31, 2005 and 2006, respectively. Research and development: Total research and development costs include labor and stock compensation for employees and contractors, rent, professional services, materials, lab equipment and disposals. These costs are expensed on the accompanying Statements of Operations as development costs. Stock-Based Compensation: The Company follows SFAS No. 123, Accounting for Stock-Based Compensation. In accounting for stock options, as permitted by SFAS No. 123, the Company will account for stock-based compensation to employees in accordance with Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees, and accordingly recognize compensation expense for fixed stock option grants only when the exercise price is less than the fair value of the shares on the date of the grant. The Company granted stock options in fiscal year 2005 and the first and second quarters of fiscal year 2006. In the third quarter of 2006 the company canceled all options by contractual agreement with the option holders. Accordingly, there are no options outstanding at October 31, 2006. The following table illustrates the effect on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation:
2005 2006 ---- ---- Reported net loss $(5,221,499) $ (3,400,102) Add: Noncash stock compensation included in reported net loss 2,724,578 300,267 Deduct: Total noncash stock compensation expense determined under fair value based method for all awards (2,730,578) (294,267) -------------------------------- Pro forma net loss $(5,227,499) $ (3,394,102) --------------------------------
The effect of applying SFAS No. 123 on a pro forma net income (loss) as stated above is not necessarily representative of the effects on reported net income (loss) for future years due to, among other things, the vesting period of the stock options and the fair value of additional options to be granted in the future years. The weighted-average fair value of options granted during 2005 and 2006 was $216,000 and $1,027,000, respectively. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 75%; dividend yield of 0%; average risk-free interest rate of 3.8% to 4.2%; and expected term of 5 years. F-8 Patent: The Company capitalizes the costs of obtaining patens when patents are granted. Patents are amortized (none in either year presented) over their useful lives, generally 17 years. Income taxes: The Company files its income tax returns on the cash basis of accounting, whereby revenue is recognized when received and expenses are deducted when paid. To the extent that items of income or expense are recognized in different periods for income tax and financial reporting purposes, deferred income taxes are provided to give effect to these temporary differences. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured by applying presently enacted statutory tax rates, which are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized, to the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that the tax rate is enacted. As the Company has not yet achieved profitable operations, no tax benefit has been reflected in the statement of operations and a valuation allowance has been established reducing the net carrying value of the deferred tax asset to zero. Fair Value of Financial instruments: The carrying amounts of items reflected in current assets and current liabilities approximate their fair value due to the short-term nature of their underlying terms. Risks, Uncertainties and Concentrations: Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash equivalents and accounts receivable. In addition, at times the Company's cash balances exceed federally insured amounts. Net Loss Per Common Share: Basic net loss per share was determined by dividing the net loss by the weighted average number of common shares outstanding during each year. The effect of common stock equivalents is not considered as it would be anti-dilutive. 2. Related party The spouse of the former Chief Executive Officer purchased a transactions $62,000 convertible note in 2005 paying interest at 9%. Total interest expense paid to this related party was $483 for the year ended October 31, 2005. The note was redeemed at par value for cash in March 2005. 3. New accounting In December 2004, the FASB issued SFAS No. 123 (revised standards 2004), Accounting for Share-Based Payments ("SFAS123(R)"). SFAS 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements, with the cost measured based on the estimated fair value of the equity or liability instruments issued. We are required to apply SFAS 123(R) as of the first annual reporting period that begins after December 15, 2005; therefore, we will adopt the new requirements beginning with our fiscal year 2007 as of November 1, 2006. As a result, we expect to record non-cash, stock based compensation expense, which may have a material effect on our future results of operations. The Company granted but then cancelled options in 2006, and hence this pronouncement would not have had a material impact on previously reported results. We are studying the specific impact of adoption, which includes our decision of whether to adopt the requirements on a prospective or retrospective basis and the specific methods for valuation. F-9 In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R). This statement would require a company to (a) recognize in its statement of financial position an asset for a plan's overfunded status or a liability for a plan's underfunded status, (b) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year, and (c) recognize changes in the funded status of a defined postretirement plan in the year in which the changes occur (reported in comprehensive income). The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006. The requirement to measure the plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The adoption of this new accounting pronouncement will not have an impact on our financial position or results of operation. The Company does not have any such plans. In June 2006, the FASB issued Interpretation 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109. FIN 48 describes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The guidance is effective for fiscal years beginning after December 15, 2006, which we intend to adopt for our fiscal year beginning November 1, 2007. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial position or results of operation. In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections" (SFAS 154) which replaces APB Opinion No. 20, "Accounting Changes" and SFAS 3, "Reporting Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 is not expected to have a material impact on our financial position, results of operations or cash flows. F-10 4. Income taxes The benefit from income taxes reflected in the accompanying financial statements, all of which is deferred, varies from the amounts which would have been computed using statutory rates as follows (000's): Year Ended October 31, ---------------------- 2005 2006 ------------------------------------------------------------ Federal income taxes at the maximum statutory rate $ 1,775 $ 1,156 State income taxes, net of Federal tax effect 210 126 Other - 11 Increase in valuation allowance (1,985) (1,293) ------------------------------------------------------------ Benefit from income taxes $ - $ - ------------------------------------------------------------ Deferred income taxes were as follows as of October 31: 2005 2006 ------------------------------------------------------------ Stock based compensation $ 1,353 $ 1,256 Fixed asset basis difference 79 37 Receivables excluded from income for income tax reporting purposes (8) (4) Accounts payable and accrued expenses deducted for financial statement reporting purposes, but not for income tax reporting purposes 91 375 Net operating loss carryforward 3,330 4,474 ------------------------------------------------------------ Deferred tax asset $ 4,845 $ 6,138 Valuation allowance $(4,845) $(6,138) ------------------------------------------------------------ Total $ - $ - ------------------------------------------------------------ For income tax purposes, the Company has net operating loss carryforwards of approximately $11.6 million at October 31, 2006 that, subject to applicable limitations, may be applied against future taxable income. If not utilized, the net operating loss carryforwards will expire between 2022 and 2026. 5. Stock grants Prior to fiscal year 2006, the Company provided restricted and options stock grants to employees and consultants as a principal element of their compensation. Compensation in the form of restricted stock grants is recorded at fair value. The Company determines compensation expense as the fair value, at the measurement date, of the service received or the common stock issued, whichever is more reliably determinable. Fair value is determined using the following policies: o For consulting agreements issued in 2005, the fair value was determined using the weighted average value of the proceeds per share received from sales of common stock to unaffiliated purchasers during that year. F-11 o The Company has also utilized employment and consulting agreements which combine cash and stock elements of compensation, where a fixed dollar value of stock is awarded to settle noncash compensation. For such stock awards through May 2005, the fair value of the services is determined based on the number of shares issued valued at the weighted average value of the proceeds per share received from sales of common stock to unaffiliated purchasers during the compensation period. For stock awards from June 2005 through October 2006, the fair value of the services is determined based on the number of shares issued valued at the closing price of the company's Class A common shares on the Over-The-Counter Bulletin Board ("OTCBB"). In the case of employees, the measurement date is the date of grant. In the case of outside consultants, the measurement date is the date at which their performance is complete. This total cost is first reflected as deferred compensation in stockholders' equity and then amortized to compensation expense on a straight-line basis over the period over which the services are performed. When the fair value of the common stock is used and the measurement date is not the date of grant, the total cost is remeasured at the end of each reporting period based on the fair market value on that date, and the amortization is adjusted. The Company issued additional consulting agreements in 2004 and 2005 which were also accounted for using the fair value of the common stock to value the compensation cost. The compensation cost is remeasured at the fair value as of the end of each reporting period and the deferred compensation account is adjusted. The Company granted 1,822,980 and 932,875 Class A shares of common stock to employees and consultants during the years ended October 31, 2005 and 2006, respectively. The Company has two separate stock plans--the 2002 and 2003 Stock Incentive Plans. Both plans provide for the issuance of stock options and stock grants. The 2002 Plan permits the issue of up to 3,250,000 shares through June 30, 2008. The 2003 Plan permits the issue of up to 10,000,000 shares (after subtracting any shares issued under the 2002 Plan) through June 30, 2013. A total of 1,822,980 shares with a fair value of $1,735,577 and 300,000 options were issued during the year ended October 31, 2005, and 932,875 shares with a fair value of $797,398 were issued during the year ended October 31, 2006. The 2003 Plan also provides for specific numbers of shares to be awarded upon the achievement of defined scientific and sales-related milestones. Stock grant and stock option activity under the Plans is as follows: Balance October 31, 2004 6,827,188 Granted 2,122,980 Forfeited - ---------- Balance October 31, 2005 8,950,168 Granted 2,622,875 Forfeited (1,990,000) ---------- Balance October 31, 2006 9,583,043 --------- Total compensation expense related to stock awards for employees and consultants was $2,724,578 and $300,267 for the years ended October 31, 2005 and 2006, respectively. Upon termination, the Company has the option to purchase any vested shares from the employees at fair market value. Shares granted to employees and consultants generally vest over periods of 8 months to 3 years. Stock options were granted with an exercise price equal to the market price of the stock at the date of grant. Substantially all of the options granted were exercisable pursuant to a three-year vesting schedule. F-12 The following is a summary of all option activity:
Weighted- Number of Average Shares Exercise Price ----------------- ------------------ Outstanding at November 1, 2004 - $ - Granted 300,000 1.10 ------- ------- Outstanding at October 31, 2005 300,000 1.10 Granted 1,690,000 0.95 Cancelled (1,990,000) 0.97 ---------- ------- Outstanding at October 31, 2006 - $ - Exercisable at October 31, 2006 - $ -
6. Stockholders' Common Stock: During fiscal year 2006, the Class B (special equity voting rights) common stock was eliminated and all remaining shares were converted to Class A shares on a one-for-one basis. Preferred Stock: During fiscal year 2006, the Company sold 6,675 shares of Series A preferred stock at an average price of $20 per share for proceeds of $133,500. The preferred stock is convertible into common stock at the option of the shareholder at a conversion rate of approximately 29.851, or into approximately 199,255 common shares. The conversion rate is the quotient obtained by dividing $20 by $0.67 which is the weighted average fair market price of the common stock during the 20-day trading period prior to the preferred stock purchase closing of the preferred stock lead investor. The preferred stock has the following rights: no dividend requirements, a liquidation preference over all common shares, participating voting rights on an as-converted basis, and 199,255 common shares have been reserved for potential conversion. In addition, the Company received net proceeds of $22,500 pursuant to an agreement requiring the Company to issue a new category of redeemable preferred stock. This amount is reflected as a liability as the Company does not have the authorized shares to meet this requirement as of October 31, 2006. 7. Notes Payable During fiscal year 2006, the Company received $180,000 in proceeds under notes payable with existing investors. The principal and $24,333 of interest is payable. If payment is not made three months from receipt of funds, then an additional $15,667 in interest is payable. 8. Leases The Company leases office space in Maryland under a month-to-month lease, and is moving its corporate offices to Tucson, Arizona effective February 1, 2007. Accordingly, the leased Maryland office space will no longer be needed after January 31, 2007. The Company leases office and laboratory space in Arizona. The lease expires April 30, 2009 and provides for monthly rent of approximately $3,020 with 3% annual escalations and is cancelable on 120 days notice. The lease was amended in fiscal year 2005 to provide for additional space. The amendment expires December 31, 2007, has non-cancelable lease payments into 2007, and provides for monthly rent of approximately $2,641 with 4% annual escalations. Total rent expense was $43,884 and $86,593 for the years ended October 31, 2005 and 2006, respectively. The future minimum lease payments required under operating leases that have an initial non-cancelable lease term greater than one year as of October 31, 2006 are as follows: Year ending October 31, Amount ------------------------------------------------------------- 2007 $ 47,577 2008 3,942 ------------------------------------------------------------- Total $ 51,519 ------------------------------------------------------------- F-13 9. Financial The Company has incurred losses since its inception of condition approximately $23,174,000 and has had limited product sales from its inception through fiscal year 2006. The Company plans to raise cash to fund its operations and pay its outstanding obligations from credit facilities or the sale of its securities in the future. Nonetheless, there can be no guarantee that the Company will be able to raise cash or maintain its current workforce through any of these plans. The Company's ability to continue as a going concern and meet its obligations as they come due is dependent upon its ability to raise sufficient cash as discussed above. The existing cash balance will fund one month of operations if no additional cash is raised. The Company anticipates it will require approximately $2,500,000 to satisfy our current budgetary projections, which include substantial payments for the component parts associated with assembly of our products. The Company's continued operations, as well as the implementation of our business plan, therefore will depend upon its ability to raise additional funds through bank borrowings, equity or debt financing. The Company continues to seek prospective investors who may provide some of this funding. The Company also anticipates it will need to maintain the current workforce to achieve commercially viable sales levels. There can be no guarantee that these needs will be met or that sufficient cash will be raised to permit operations to continue. Should the Company be unable to raise sufficient cash to continue operations at a level necessary to achieve commercially viable sales levels, the liquidation value of the Company's noncurrent assets may be substantially less than the balances reflected in the financial statements and the Company may be unable to pay its creditors. During the fiscal year ended October 31, 2006, the Company received $479,000 in funding, comprised of: - $133,500 for 6,675 shares of preferred stock at an average price of $20.00 per share, and $22,500 for redeemable preferred stock. - $143,000 for 457,563 shares of common stock at an average price of approximately $0.31 per share. - $180,000 for notes payable. 10. Subsequent Subsequent to October 31, 2006, the Company issued to events accredited investors 2,340 shares of redeemable preferred stock for $216,520 in proceeds and 2,054,251 shares of common stock for $273,500 in proceeds. On January 9, 2007 the Company held a special meeting of shareholders at which time the shareholders voted to increase the authorized Class A common shares of stock from 50.2 million to 100 million. The additional shares of stock will facilitate future fund raising activities of the Company. F-14 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 2, 2007. CDEX INC. By: /s/ Timothy Shriver ------------------------------ Name: Timothy Shriver Title: Chief Executive Officer/President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose signature appears below constitutes and appoints Timothy Shriver, as such person's true and lawful attorney-in-fact and agent, with full powers of substitution and re-substitution, for such person in name, place and stead, to sign in any and all amendments to this report on Form 10-KSB, in any and all capacities, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorney-in-fact and agents, and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the dates stated. NAME TITLE DATE - ---- ----- ---- /s/ Timothy Shriver CHIEF EXECUTIVE OFFICER/ February 2, 2007 - ------------------------ PRESIDENT (PRINCIPAL TIMOTHY SHRIVER FINANCIAL AND ACCOUNTING OFFICER) /s/ Dr. BD Liaw CHAIRMAN OF THE BOARD February 2, 2007 - ------------------------ OF DIRECTORS DR. BD LIAW /s/ George Dials DIRECTOR February 2, 2007 - ------------------------ GEORGE DIALS /s/ Donald W. Strickland DIRECTOR February 2, 2007 - ------------------------ DONALD W. STRICKLAND 27 EX-31 2 ex31.txt EXHIBIT 31 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF ACCOUNTING AND FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Timothy Shriver, certify that: 1. I have reviewed this annual report on Form 10-KSB of CDEX Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: a. designed such disclosure controls and procedures to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal controls over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal year that has materially affected, or is reasonably likely to affect, the small business issuer's internal control over financial reporting; 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Dated: February 1, 2007 /s/ Timothy Shriver ------------------- Timothy Shriver President, Chief Executive Officer, and Chief Accounting and Financial Officer EX-32 3 ex32.txt EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of CDEX Inc. (the "Company") on Form 10-KSB for the fiscal year ended October 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Timothy Shriver, President and Chief Executive Officer (and Chief Accounting and Financial Officer) of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 1, 2007 /s/ Timothy Shriver ------------------- Timothy Shriver President, Chief Executive Officer, and Chief Accounting and Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----